FEATURE ARTICLE, FEBRUARY 2008

MONEY FOR THE MIDDLE MARKET
KeyBank’s Commercial Mortgage Access program brings big resources to small balance banking.
Kevin Jeselnik

Cleveland-based KeyBank Real Estate Capital is one of the nation’s largest providers of capital for commercial real estate, and to further solidify its position, the company has established Key Commercial Mortgage Access. The small loan origination and securitization platform has been in existence for a couple of years, but recently was reinvented and given a major boost through the hiring of Charles Krawitz as managing director of the program. Joining KeyBank from LaSalle Bank late in 2007, along with new KeyBank directors Ryan Walsh, Jonathen Willems and Chad Eisenberg, Krawitz is utilizing his extensive experience in small loan securitization business to build the Key Commercial Mortgage Access program into a major player in the small-balance lending market.

Charles Krawitz, Managing Director of Key Commercial Mortgage Access, KeyBank Real Estate Capital

The program started off targeting KeyBank’s network of community banks, as a sort of grassroots effort to source deals through the company’s retail community bank branches. “The business model has been to take KeyBank’s centralized capabilities, such as our capital markets expertise, and roll that down to the community bank level,” says Krawitz. “We are able to offer products to smaller, individual borrowers that they would not typically have access to.”

KeyBank is one of only a few large lenders to engage in small balance-only securitizations. As part of the programs expansion, Krawitz and his team of 12 originators have begun sourcing from a network of commercial mortgage brokers, in addition to sourcing from KeyBank’s own retail platform. “Increasingly, in this market environment mortgage brokers that have heretofore specialized in loans that were significantly larger are turning their attention to smaller loans,” Krawitz explains.

There are a few reasons for the growing interest in arranging and funding smaller loans. “I think that the preponderance of transactions that occur in the small balance space draw people in, along with the fact that the larger deals are increasingly few and far between,” Krawitz adds. “The smaller sized transactions occur all over and on a daily basis. They are not as impacted by some of the liquidity issues that have affected the marketplace, and some of the large brokerage firms realize that this niche is worth their attention.”

The small balance loan market has changed a lot over the years. Before, they were just the providence of local community banks. With involvement from larger institutions such as KeyBank, national mortgage brokers are growing more comfortable with this type of transaction, and finding that small balance lending can be a relatively simple process.

Key Commercial Mortgage Access finances loans from $500,000 to $8 million, and is involved in all of the major property types. “I don’t have a statistic, but if you just look at the number of commercial properties in the United States, a vast majority of them have to be in our strike zone,” Krawitz says. “So, there is a huge pool of assets for this type of product, and we are seeing ample transactional activity.”

Much of the small balance lending business over the past few years has been driven by the frenzy of 1031 exchange activity, with money pouring out of the West Coast and into the Midwest and Southern markets. Increasingly, new business is now being driven by refinances and prudent purchase opportunities, Krawitz says. And regardless of the problems plaguing the residential sector, commercial borrowers can still find very attractive terms.

KeyBank’s program provides financing for all the primary sectors, but the team has found success focusing on the mobile home park and self-storage sectors. Krawitz has a long history of arranging loans for the mobile home park sector, and has found similar success, and similar underlying fundamentals, in the self-storage market. A major characteristic for both is a very sticky tenancy, where customers retain their rental for long periods of time. The average deal size in self-storage is approximately $1.5 million, which Krawitz notes is the program’s, “sweet spot.”

“Self-storage could be a beneficiary of the fallout in the single-family residential marketplace,” Krawitz notes. “As people move from single-family to multifamily residences, they are going to need to place their excess furniture and property somewhere. Obviously, the multifamily market itself will benefit from the problems in the single-family market; I am very bullish on multifamily, in general. I believe the stat is that there are 3 million individuals that will turn 18 each year between now and 2020, which is an indication that the pool of renters will greatly increase in the coming years.”

The Key Commercial Mortgage Access program offers borrowers 30-year amortization schedules, 80 percent loan-to-value, and 1.20 debt service coverage. Few independent community banks can match those terms. The fees are covered by a fixed $6,000 cost.

The team recently completed a $1.4 million acquisition loan for Shawnee Garden, a 47-unit multifmaily property located at 11207 West 60th Terrace in Shawnee, Kansas, as well as a number of additional self-storage and multifamily loans from Montana to Oregon.

As the program expands, Krawitz and his team expect that the ease in which the program facilitates the loan transaction will convince other mortgage brokers and lenders that the small balance market is a largely untapped and viable source of business.

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