What is the state of the commercial mortgage lending business in Kansas City as we near the end of 2002? And what about the state of the commercial mortgage lending market, in general?

The answer to both questions is virtually the same. Kansas City, like many cities around the country, has been significantly impacted by a declining economy and a number of business failures and business stagnations. And yet the market is defined by two factors that somewhat conflict with each other. First, lower occupancies and rental rates, plus increased operating expenses (especially in the area of insurance) negatively impact property values.

Simultaneously, an under-performing stock market and much lower bond yields on corporate securities have pushed the investment market toward real estate investment, both to purchase and finance. The result is an abundance of capital, further stabilizing already low rates and pushing values up for properties in demand. It also increases the flexibility of lenders in certain situations.

Therefore, the underwriting process is somewhat different than it was 18 months ago. Lenders are more conservative in reviewing

their loans-to-value--lest the recession not disappear, but rather continue or decline further. It is difficult to obtain a "full" loan on office properties today with vacancy projections at higher levels and tenant improvement and lease commissions analyzed more carefully.

Most institutional lenders also are examining "refinance risk." That means if they make a loan today at 5.75% or 6%, the specter of having to refinance that building several years from now (or have it balloon) with interest rates of 8% or 9% is a risk that cannot be overlooked. This affects aggressive requests for loan dollars. Capitalization rates on purchased properties have dropped, but with lower alternative returns, people are paying them. Whether or not the properties will retain those values over a five- or 10-year period is a fair question. Consequently, expect fewer dollars on most office building loans.

On the other hand, lenders are more innovative today. Some are offering interest only periods of one and two years. Floating rate loans or those with two notes (an A and B note with different terms) are possible. Shorter term loans are becoming more attractive to some borrowers and are available with future rate adjustments. Sometimes prepayment flexibility can be negotiated.

This is the single greatest time for financing a commercial property in several decades.

While a borrower may have to sacrifice a little on the size of his loan, all other factors indicate it's a tremendous time to put your financing "to bed." Even if you have to pay a small premium to lock up your long-term financing for funding six to 12 months from today, it is well worth considering. It's just important to know that comparable rents and vacancies are being examined closely.

Good news in the commercial real estate market in Kansas City is that even though vacancy is up, we are actually not "overbuilt" in new office buildings, new industrial buildings or large, unoccupied shopping centers.

We do have some continued softness in our apartment market, but it is manageable. Many other cities around the country find themselves in an overbuilt office market, apartment market or, to a lesser degree, industrial market. In retail, although some large individual companies have failed, the sector continues to march along at a fairly steady pace everywhere.

No one knows what will happen to interest rates in the future, but it is a distinct probability they will trend higher, not lower. And as they do, the appetite for lending and the underwriting will not get more aggressive. Overall, the combination of low interest rates, low interest rate spreads and the availability of capital for good real estate has made this the single greatest time for financing a commercial property in several decades.

Tom Turner is chairman of Collateral Mortgage Capital, previously president of Charter American Mortgage Co., and has been a commercial mortgage banker in the Kansas City area for 30 years. You can reach him at tturner@collateralkc.com or at 913.748.4444.