{"id":1004480638,"date":"2020-10-01T17:07:54","date_gmt":"2020-10-02T01:07:54","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004480638"},"modified":"2020-10-02T12:46:23","modified_gmt":"2020-10-02T20:46:23","slug":"debt-funds-that-can-continue-to-hunt-for-deals","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/debt-funds-that-can-continue-to-hunt-for-deals\/","title":{"rendered":"Debt Funds That Can Continue to Hunt for Deals"},"content":{"rendered":"

Prior to the onset of the COVID-19 pandemic, debt funds had carved out a solid niche in the commercial real estate lending space. But as has been the case with other lenders, many debt funds moved to the sidelines or began tending to troubled loans after the economic lockdown brought a halt to commercial real estate sales and created distress overnight. Some, however, remain in the market. What\u2019s the difference between the two? Leverage.<\/p>\n

READ THE DIGEST<\/a><\/p>\n

In particular, debt funds that relied on warehouse lines faced debilitating margin calls as the crisis unfolded. Meanwhile, those that replenished their capital by selling part of their loans to banks or in the collateralized loan origination market saw those sources dry up, too. Some of the largest debt funds, including TPG Real Estate Finance Trust, Colony Credit Real Estate and Granite Point Mortgage Trust, have had to sell assets to improve their liquidity positions.<\/p>\n

\u201cMany leveraged players saw their loans blow up and had to walk away from a lot of equity,\u201d said Gary Bechtel, CEO of Red Oak Capital Group, a debt fund based in Grand Rapids, Mich. \u201cBut the funds that didn\u2019t use leverage remain in the market and continue to raise and deploy capital.\u201d<\/p>\n

Flexible but pricey<\/h2>\n

Debt funds are private pools of non-regulated capital that typically provide borrowers with short-term loans for construction, value-add projects or other situations that require gap or bridge financing. Debt funds generally offer higher loan-to-value ratios, speedier execution and more flexible terms than banks. But borrowers pay upwards of 250 basis points more for debt fund capital. Leveraged funds can generate annual yields of 12 percent to 15 percent, while balance sheet debt funds deliver 9 percent to 11 percent.<\/p>\n

Although debt funds make up a small percentage of the overall commercial real estate lending market, the space has attracted numerous players over the past few years, including separate accounts held by life insurance companies and banks<\/a>. Using bridge lenders as a debt fund proxy, Bechtel has tracked the growth of these alternative lenders. In 2019, the number peaked at more than 360, up from 150 in 2015, he said. Today that number has likely dropped to less than 200, he estimated.<\/p>\n

What\u2019s more, 91 real estate funds raised more than $39 billion in 2017, the high water mark in terms of dollar volume over the past five years, compared with 60 funds that raised nearly $16 billion in 2015, according to Preqin. Only 20 funds raised about $7 billion in the first two quarters this year.<\/p>\n

Douglas Weill, managing partner for Hodes Weill & Associates, a real estate capital advisory firm based in New York, suggested that debt fund capital raising could remain muted for the next several quarters. Institutional investors his firm works with that regularly invest in the funds are looking to be more aggressive in this environment, he said.<\/p>\n

\u201cIn our view, institutions have dialed up their return and risk profile \u2013 they\u2019re a little less interested in a strategy that\u2019s returning 8 to 10 percent today,\u201d he said. \u201cThey think they should be playing more offense and focusing on equity and distress.\u201d<\/p>\n

\"Debt<\/a>

Source: Prequin<\/p><\/div>\n

Deal hunters<\/h2>\n

Debt funds that finance deals off their balance sheets remain active, although they have become more selective and conservative. Before the pandemic, debt fund borrowers could secure financing with an interest rate of 5 percent to 6 percent based on the 30-day London Inter-bank Offered Rate of around 1.7 percent, said Joseph Iacono, CEO and managing partner for Crescit Capital Strategies, a New York-based alternative commercial real estate lender. Today that interest rate is as much as 8 percent or higher, even though LIBOR is roughly 150 basis points lower.<\/p>\n

\u201cThe risk premium has gone up,\u201d he explained. \u201cDebt funds are not putting as much money out, and they are charging more for the money they do put out, and they\u2019re going to be very picky about where they put that money.\u201d<\/p>\n

While debt funds have long favored a value-add strategy that profits from significant increases in rental rates or property values, pursuing those deals today makes less sense given the uncertainty about the future. Instead, the funds are financing projects in need of light improvements or leasing.<\/p>\n

Debt funds are also seeing more opportunities to make construction loans<\/a> as banks have pulled back, said Toby Cobb, co-founder and managing partner of 3650 REIT, a commercial real estate lending and investment management services firm. Still, even though lenders can demand better terms for the loans to mitigate risk, they\u2019re more difficult to make compared with loans on transitional assets, he added.<\/p>\n

\u201cCost overruns and mishaps are a real component of being a construction lender,\u201d Cobb said. \u201cAnd, right now construction loans are more complicated\u2013it\u2019s not easy to put out capital because of questions surrounding how long the pandemic lasts and whether we should be building anything at all.\u201d<\/p>\n

To the rescue<\/h2>\n

To take advantage of more opportunistic situations, some funds are providing \u201cwhite knight\u201d capital to stressed hotel and retail property owners, who are repurchasing existing debt at a 20 percent to 40 percent discount from their lenders.<\/p>\n

In Colorado Springs, for example, Dallas-based Revere Capital this spring provided the owner of a 360,000-square-foot shopping center with $19.6 million, which funded a $22 million payoff of the $34 million loan held by a mortgage REIT as well as a reserve account for leasing costs. The REIT had seen its share price plummet about 70 percent since the lockdown and needed to improve its liquidity position to meet a margin call from its repo lenders, said Clark Briner, founder and principal of Revere Capital.<\/p>\n

\u201cDiscounted payoffs were a great business between 2009 and 2012, and we\u2019re seeing them return,\u201d said Briner. \u201cBanks and other lenders are trying to monetize their allocations in the retail and hospitality space, if they can, because they don\u2019t know how the coronavirus is going to affect those assets.\u201d  <\/p>\n

Acres Capital, based in Westbury, N.Y., is considering similar deals in the hospitality sector. One owner of 55 hotels has an opportunity to buy back loans at a discount but can\u2019t find conventional financing, said Mark Fogel, CEO of Acres. That kind of dynamic should open a path to one or two well-located hotels with high-quality flags, he added.<\/p>\n

\u201cLenders just don\u2019t want to dig a deeper hole by laying out more money and not get paid debt service,\u201d Fogel said. \u201cThey\u2019re thinking that they can get their best price now, before a flood of distressed notes begins to hit the market.\u201d<\/p>\n

Debt funds clearly recognize these potential opportunities in such an environment, and with forbearance periods ending, they\u2019re likely to become even more plentiful. Whether the funds can take advantage of them, however, depends on their ability to look ahead rather than behind.<\/p>\n

\u201cThe whole idea of playing offense today depends on the extent to which a fund is leveraged and what condition your loans are in,\u201d said Jack Gay, global head of commercial real estate debt for Nuveen Real Estate. \u201cIf you have a lot of leverage and more challenged asset classes like hotels and retail, then certainly you\u2019re focused on liquidity and are playing defense instead of offense.\u201d<\/p>\n

Read the October 2020 issue of CPE.<\/em><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The pandemic and lockdowns have largely sidelined alternative lenders that depend on leverage, but those that use their balance sheets remain active.<\/p>\n","protected":false},"author":890,"featured_media":1004481064,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21825],"tags":[44420,47102,42281,44834,43901,50353,37071],"class_list":["post-1004480638","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-finance","tag-3650-reit","tag-colony-credit-real-estate","tag-gary-bechtel","tag-granite-point-mortgage-trust-inc","tag-nuveen-real-estate","tag-revere-capital","tag-tpg-re-finance-trust"],"acf":[],"yoast_head":"\nDebt Funds That Can Continue to Hunt for Deals - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/debt-funds-that-can-continue-to-hunt-for-deals\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Debt Funds That Can Continue to Hunt for Deals\" \/>\n<meta property=\"og:description\" content=\"The pandemic and lockdowns have largely sidelined alternative lenders that depend on leverage, but those that use their balance sheets remain active.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/debt-funds-that-can-continue-to-hunt-for-deals\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2020-10-02T01:07:54+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-10-02T20:46:23+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2020\/09\/featured-finance-iStock-1148389155.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1000\" \/>\n\t<meta property=\"og:image:height\" content=\"750\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Joe Gose\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/debt-funds-that-can-continue-to-hunt-for-deals\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/debt-funds-that-can-continue-to-hunt-for-deals\/\",\"name\":\"Debt Funds That Can Continue to Hunt for Deals - 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