CRE lenders seek creative solutions to keep capital flowing
On the heels of another Fed rate hike, the commercial real estate sector is feeling the painful effects of rising capital costs and falling loan amounts.
Borrowing costs have doubled over the past six months. And rising rates and growing certainty that Fed policy will push the country into a recession are creating dislocation in capital markets. Big banks, in particular, have largely moved away from commercial real estate lending, and prime mortgage lenders across the board, including Fannie Mae and Freddie Mac, are cutting loan amounts due to higher costs of hedging. debt service.
“It’s not that higher interest rates were unjustified, but the speed at which the Fed is pushing rates has shocked the market,” said Richard Ortiz, co-manager at Hudson Realty Capital. Some borrowers are effectively frozen, unsure of how to react and recapitalize, while lenders are also unsure how to lend in a market where there is so much turbulence and uncertainty, he adds.
Although lenders can’t do much to lower their rates, they are looking for ways to keep capital flowing. “We’ve really shifted our focus over the past nine months to try to reflect the new reality we’re facing,” says Scott Larson, managing director at Pangea Mortgage Capital (PMC). The mid-market balance sheet lender enters areas of the market where capital has disappeared.
PMC recently launched a short-term multi-family loan product to help sponsors overcome turmoil in the CLO market. Historically, PMC has focused on providing bridge loans with terms of two or three years. It now offers a short-term 12-18 month multi-family bridging loan to help borrowers realize their business plans. The short-term bridge loan comes into play for both acquisitions and construction projects that require more capital due to project delays or cost overruns. “We’re just trying to provide a temporary solution for sponsors until things stabilize,” Larson says.
Short-term solutions are a common theme. For borrowers exiting a bridge loan or construction loan, they often choose to extend if they have extension options. “We see a lot of our borrowers extending their existing debt and hoping that there will be cheaper options available in the future,” says Shlomi Ronen, founder and managing director of Dekel Capital, a Los Angeles-based real estate trader. bank.
New solutions emerge
Red Oak Capital Holdings is an existing bridge lender that is expanding its fixed rate bridge loan offering to include three new products: a Basic, Basic-Plus and Participatory Bridge Loan Program, as well as a – renown opportunistic relay. “Floating rate transactions are not as viable or as efficient as they were six to eight months ago. So many borrowers are transitioning to fixed rate lenders, especially non-debt fixed rate lenders like us,” said Gary Bechtel, CEO of Red Oak Capital Holdings. “We have seen a huge demand for our loans, which is why we have expanded our loan program,” he adds.
Red Oak’s core and core plus products are funded by its Oak Institutional Credit Solutions debt fund, with strategies on the more conservative end of the bridging loan spectrum, Bechtel notes. The core loan program, in particular, provides a reserved capital solution for borrowers, such as those waiting for the market to stabilize before selling an asset, he adds.
Opportunistic and crowdfunded bridge loan programs are funded by capital raised through brokers and RIA channels and tend to be more aggressive in their structure, pricing and risk tolerance, Bechtel adds. For example, on its opportunistic bridge loans, Red Oak offers up to 75% loan-to-value (LTV) ratio and up to 90% loan-to-cost (LTC) ratio, based on stabilized value or underwriting the transaction.
Its equity bridge loan program also includes an equity component from Red Oak in exchange for a percentage of the value creation realized in the project upon sale or refinancing. The product offers up to 75% loan-to-value (LTV) ratio and 100% loan-to-cost ratio, depending on the underwriting of the transaction. “This program is for projects that have a very heavy component where you acquire an asset that is going to be repositioned, such as refurbished and re-leased or converted to another use,” Bechtel explains.
Agency programs provide liquidity
Recent volatility in the CRE CLO new issue market has forced some issuers to get creative with pricing. One of the paths they have followed is to issue via the Freddie Q Program, which provides, for a fee, a guarantee to the senior part of the capital structure of loans of similar characteristics to those that have traditionally backed CRE CLOs. “This guarantee helps provide a lower overall cost of capital to the issuer compared to what they could currently find in the traditional CRE CLO market. This has proven to be a popular decision and the issuance pipeline of Q fills up fast,” says Rob Jordan, CMBS Product Manager at Trepp.
Generally speaking, GSEs also continue to be a good source of capital for multi-family borrowers. For example, Hudson Realty Capital is working on a $30 million construction loan for a multifamily construction project in Salt Lake City that is funded by the HUD program (d)(4). “Borrowers have failed to get their banks to commit, not so much to the price of the loan, but to the product,” says Ortiz.
As the process progressed, banks continued to reduce the amount they were willing to lend. In the end, there was no certainty that the banks would complete the loan. The developer submitted loan application (d)(4) and received HUD approval very quickly. Once the deal was approved, the borrower also knew there would be no deviations based on a credit committee decision, Ortiz notes. “Getting loans through HUD in a faster way these days really helps this product,” he adds.
Gap Capital Aligns
Capital is also lining up to bridge the growing gap between the senior loan and equity share in a sponsor’s capital stack. In some cases, the LTVs went from 65% to 45-50%. Lenders such as Hudson Realty Capital, PMC and others are lining up to provide mezzanine financing or preferred shares. Although the spread capital space is increasingly crowded, capital providers are also selective in the types of deals they are willing to enter into. “Also, the ability to step in and structure that spread capital in concert with the first mortgage lender is where some companies can stand out,” notes Ortiz.
Bridge financing is in demand in a variety of scenarios. For example, some buyers are looking to buy properties with assumable debt at a lower rate. Finding an existing interest rate that could be 3.25% is much more attractive than if they were to take out a new loan and have to accept a 6% rate, notes A. Yoni Miller, co-founder of QuickLiquidity. “The problem is that most of these assumable loans are at a low level of leverage,” he says. For example, a property that is sold for $10 million may only have an assumable debt of $5 million. Many buyers arrive with a 25% deposit. “So they turn to us for mezzanine financing to help them bridge the gap,” he adds.
The cost of this capital isn’t cheap, with financing rates typically in the low to mid-teens and a term of three to four years. Mezzanine loans and preferred stocks are often priced in the low to mid-teens. “The volume of transactions has not been extremely high. So there are probably more groups offering this type of capital than there are looking for it at this point, but that will eventually change as more borrowers will be forced to make decisions about their properties.” , adds Ronen.