By Jon Leifer
As interest rates rise and the stock market seesaws, commercial real estate values are rebalancing and conventional lenders are less comfortable with transitional and other complex, hard-to-value property deals. This growing unease among conventional lenders today is amplified by uncertainty over the continuity of consumer purchasing power, a rising number of transactions experiencing failed or stalled closings, and changes to the federal tax code that appear to unduly penalize high-tax states like Connecticut, New York and New Jersey.
Consequently, deal sponsors are finding that conventional lenders are turning away real estate deals that do not fall within their lending “fairway,” which is reserved for the most experienced and financially sound sponsors with easily understood business plans.
Conventional Lenders Retreating
Within these states in particular, lenders and investors are re-evaluating their decisions about locations that are likely to benefit or suffer from geopolitical, tax and demographic shifts—continuing to assess the ramifications for multifamily, office, retail, industrial and land. Have land prices on for-sale luxury or attached senior housing products in Westchester County peaked? How will retail assets in western Connecticut price going forward as wealthy residents flee the state and average household incomes fall? Will land and redevelopment assets in New York’s outer boroughs and suburban New Jersey become more attractive for investment as they remain the “relative value” alternatives to these other, more expensive locales?
In light of these uncertainties, many owners curbed their buying appetites in late 2017 and took a “wait-and-see” approach to bidding, as assets continued to re-price. This pause created a meaningful bid-ask spread between buyers and sellers going into early 2018, and signal to many traditional lenders that asset values have become “choppy and toppy.”
On a daily basis, private lenders see the impacts of conventional lenders’ retreat. For some borrowers, even their longest-standing bank relationships are hesitant to extend sufficient loan proceeds to meet their business objectives. Others who did receive attractive initial bank loan offers routinely report being re-traded on final loan terms, sometimes by as much as 15 to 20 percent of the originally offered proceeds. Reasons for bank re-trades usually key on the failure of bank appraisals to support exit values or validate loan-to-value cushions—a sure sign that banks are skittish due to recent market volatility.
Private Lenders Overcoming Uncertainty
Many private lenders view this year’s market volatility more positively, as the recent market clearing has encouraged many capable sponsors who sat out of the run-up in pricing in 2016 and 2017 to re-enter acquisition mode. As we enter mid-2018, we see the right sponsors making strong transaction bids that are supportable based on their operational capabilities, and unlike our conventional lending peers, we are open to funding transitional or “story” deals that are conventionally unbankable.
Private lending capital is nimble and discretionary, and can close quickly because it is not subject to time-consuming committee reviews. Private lenders have experience across an array of deal profiles, whether the deals pose mid-entitlement risks, contain vertical construction risks, have turnaround/recapitalization themes, are stalled by partnership disputes or are emerging from bankruptcy. With respect to property types, private lenders are also versed in handling the unique challenges of land acquisition bridge loans across the four main asset classes, as well as special-purpose property types, should sponsors be developing senior housing, assisted living, memory care or marinas, which may deter conventional lenders at first glance.