The Lending Landscape
During the first quarter of 2010, four financing sources effectively took control of the lending market. Government-sponsored enterprises, insurance companies, real estate investment trusts, and private situational lenders have money to lend and will finance projects that the national, regional, and community banks won’t touch.
In a move to target multifamily mortgage refinancing, Freddie Mac has developed mezzanine lending programs, which allows it to partner with experienced players to help borrowers who need to finance or refinance overleveraged and undervalued properties. For example, Prudential Mortgage Capital Co. and Johnson Capital recently joined forces to originate and service multifamily loans for Freddie Mac. This joint venture, Prudential Johnson Apartment Capital Express, will originate multifamily loans starting at $5 million in Arizona, California, Maryland, Virginia, and Washington, D.C.
Another big player in the multifamily market is insurance companies. After a relatively dormant 2009, life insurance companies are stepping back into this market and filling the pricing gap with the GSEs. Throughout 1Q10, insurance firms such as Prudential, MetLife, and Northwestern Mutual have become more competitive — a direct result of a decrease in cost of capital.
In addition to working alongside GSEs, some insurance companies have found opportunities in areas where GSEs are less inclined to lend, such as new properties still in lease-up and properties in pre-review markets. Life insurance companies are poised to thrive in today’s revolutionized lending market as they have an exceptional amount of flexibility in their underwriting.
Private equity funds, such as REITs and situational lenders, are starting to take the lead with distressed and rehab properties. Private equity funds have become an increasingly popular option because they generally finance the riskiest part of the capital structure — sometimes as much as 100 percent of the capital requirements — and often seek returns greater than 20 percent.
REITs recently have started to pick up steam again because of the broad-based opportunities available in distressed asset acquisitions. Commercial mortgage REITs typically originate or invest in the debt used to finance the purchases of specific properties such as office towers, hotels, and shopping centers.
The appeal of commercial mortgage REITs is that they usually rebound strongly after difficult times — as seen in the previous commercial real estate crisis back in the 1990s. So far this year, commercial mortgage REITs are up 9.6 percent compared to 2009 when they were down 8.0 percent. An up-and-coming firm in this market is Ladder Capital Finance, which had its initial public offering in late 2009. So far this year, Ladder Capital has completed four commercial real estate transactions totaling $40 million, including a nearly $8 million refinance loan for a retail building in Aventura, Fla.
Many borrowers looking for safe, reliable sources of financing with attention to time and special circumstances continue to turn to situational lenders. Essentially, situational lenders provide borrowers with hard money or bridge loans to keep their existing projects going until they can refinance. A hard money loan, which strictly deals with the value of the borrower’s assets, is based on an agreed-upon loan-to-value ratio and a collateral piece that is not fundable by conventional lending firms. A bridge loan, on the other hand, deals primarily with providing funding from one lending source to another. Bridge loans generally have lower interest rates than hard money loans.
Situational lenders have become attractive sources of financing in today’s economy mainly due to their attention to speed, but also because their loans are tailored to the value of the collateral property and the overall risk level of the collateral. A good example of situational lending in action was a $3 million dollar luxury residential development loan that Kennedy Funding extended to M Group Resorts S.A. to finance the construction of the Jalousie Enclave in St. Lucia, West Indies.
Despite the restricted market, borrowers still face many decisions when it comes to securing capital for commercial real estate projects. However, these modern traditional lenders have gained increased popularity because of their handling of deals in the midst of the economic crisis. Their attraction to borrowers will continue once the eventual recovery occurs.