I think it’s very, very important. just being able to see both sides. With a life insurance company, their goal is to fund a loan and keep it on the books throughout the term of the loan.

So how does other life insurers such as Prudential or MetLife differ?
INS: Most are not pooled in the securitization world, they are strictly life company lending: loan leverage, higher coverage, very strong borrowers, high net worth, high liquidity borrowers that are usually local to their territories, local to their properties unless, of course, they are a massive company. And so those are all reasons that they use to basically make sure that in their portfolio their loans are less risky. But, getting back to AIG, I think that they were also involved on the residential side, whereas other life companies have limited exposure to the residential side. I think that’s another part of the reason why AIG had so much exposure and so many problems as far as residential exposure in failing. It’s amazing going from the conduit world where it was very aggressive to the insurance world where it is the opposite. In the conduit world, lenders were competing to issue 85% and 90% loans, whereas life companies would still only issue 65% leveraged commercial loans. A lot of people would ask “how are you getting borrowers to accept these terms?” In reality, there are certain borrowers in the market for a loan simply to cash out (i.e. trying to get as much leverage as they can to put that money towards the next project). Then, there are certain borrowers that would rather have a lower-leverage loan because there is less risk for them in paying that loan back. For example, if at the time a 10-year loan is funded, the property securing that loan is 95% occupied, but there may exist in a few years the possibility that some of the tenants may not renew their leases upon expiration. That may drop occupancy to say 80%, which means the property is generating less revenue then it was. If the original loan was, say, 90% loan-to-value, the borrower may now have trouble making the month debt service payment because the payment is so high, and the revenue generated from the property is now lower than it was the day the loan funded. If the original loan was 65% loan-to-value, even with a drop in revenue at the property due to a drop in occupancy, the borrower may still be able to make the monthly debt service payment without having to lease up the space that was lost when those tenants vacated. Especially in this market, where vacancies are rising and less tenants are looking for space due to foreclosures, this is a much better place to be in.

You have mentioned that some insurance firms service their commercial loans. How important do you think that is to the quality of their portfolio and risk management?
INS: I think it’s very, very important. just being able to see both sides. With a life insurance company, their goal is to fund a loan and keep in on the books throughout the term of the loan. When you’re servicing a loan that you funded, you have it on your books for the term— it could be a 10-year mortgage, a 20-year mortgage, they have to deal with that property. They have to make sure that borrower can make their tax payments, and their insurance payments. And so the goal at origination is not to fund it and hurry up and sell it, it’s to fund it into another property or another borrower and to basically create a working relationship that they’re going to have during the next 15, 20 years. Servicing it makes a big difference because it really reduces the amount of aggressiveness that they are going to take because so much can happen in 15, 20 years. It also helps their risk because they’re on top of dealing with the property on a daily basis and they’ll know about the blowout tenant that terminates, and tenants that file for bankruptcy. Part of the mortgage requirements is that borrowers have to report to their lender quarterly, monthly, or annually on how the property is doing, the operating statements, the coverage, the rent role, the occupancy. Having that hands-on approach with the property and being in tune with exactly what’s happening, almost on a monthly basis, I think really allows them to be on the lookout for any problematic moments.

Can you explain the difference between servicing a loan and asset management?
INS: Servicing and asset-management do work hand in hand. Typically, they are two separate departments that work together. The first thing would be, dealing with collecting the monthly rent payments, depending upon the terms reached by the deals, some deals might require the borrowers to escrow the taxes and insurance payments with the lender and that way the lender is paying the bill once it is due. That basically insures that the taxes and insurance, in addition the monthly interest payments, are paid on time. Servicing could be dealing with the amortization schedules, the accounting side of it for the lender. The asset management side would be, for instance, if you have one loan that was secured by three properties, if the borrower where to, five years into the loan, sell one of the properties, and replace it by buying another one, that would be something an asset-manager would deal with. An asset manager would also deal with issues of tenants terminating. If a tenant terminates early, there’s a termination payment. Typically there’s an arrangement between lender and borrower. If not, maybe some sort of work out where the lender might take some of that money in escrow, that way it’s used for basic costs, basic commissions, for the borrower to have the money in an escrow account.

I’d like to talk to you about the ramifications of the financial crisis. Even though more life insurers and conservative firms company have not been taking high-risk deals, how are they affected by the crisis? Like everyone else, is capital tighter– even though the funding comes from their insurance premiums?
INS: It’s actually two-fold. First, you might want to consider it a good thing. Because they are one of the few active lenders still closing deals– there are still real estate transactions that are happening. In the market, borrowers need leverage somewhere. They might not be able to get 80% any more, but at least they can get 60% or 65%. Certainly at closing they now have to come up with 35% equity as opposed to 10% or 20% as was required in the conduit markets, but at least there is a lender there who can still deal. In fact, they have actually seen an uptick in the amount of deals that they are seeing with brokers, so they have the ability to pick and choose only the best ones that they feel the most comfortable lending. So that might be the good side of it. In any event, life companies, at the beginning of each year, typically allocate a certain amount of dollars that they’re going to lend for that year. Even though they’re getting so many more deals to pick through, they really haven’t increased their allocations because capital is tighter and they’re getting concerned that there is so much uncertainty of how the market is going to shake out and when. On the other side, capital is tighter. They are already conservative by nature, but they are even more conservative in today’s market and there is more due diligence done at closing because of the uncertainty. It seems like every time we turn around, another tenant is filing bankruptcy so that affects a lot of the deals that you are seeing. So because of all these uncertainties out there in the market, the capital is still there because, as you mentioned, it comes from their insurance plans, but it is a lot more difficult to get that approval to actually fund a deal.