by Roger Wyche
There will be approximately $96 billion of CMBS loan expirations during 2017. CMBS lenders, therefore, have been counting on refinancing Borrowers to increase their loan originations. However, CMBS lenders are facing challenges getting these deals funded due to several obstacles. Firstly, there is a minimum debt yield ratio (9%) on loans and have stringent risk retention rules for securitizing loan pools; secondly, many borrowers now potentially have credit issues since their loans may have usually been modified by a Special Servicer to keep their property out of foreclosure. These workout experiences, which were once new to a lot of CMBS Borrowers, have led Mortgage Bankers to source alternate solutions for their clients with challenging refinancing situations.
In addition, banks have pulled back on construction loans, especially since the summer of 2016. Historically, banks have provided the bulk of construction loans but developers are now finding it difficult to finance the majority of their projects. It is only the projects with lowest risk that are assured loan funding. If developers do find a construction loan, the loan is usually limited to 65% loan to cost or less, which increases the equity component in the capital stack. Other reasons for the slowing down of construction loans are: banks have “maxed” out their construction loan bucket; regulators have increased their reviews of CRE loan portfolios to make sure the banks are not getting “over their skis” in CRE lending; and finally, lenders are saving their “dry powder” for their best deposit clients of the bank.
Given the CMBS lenders’ obstacles with refinancing and the banks’ pullbacks in construction lending, private lenders are now moving into these spaces to provide capital and liquidity to borrowers. The good news is that private lenders are not nearly as highly regulated as CMBS, insurance companies, or bank lenders. They can offer flexible structures on products such as Bridge, Floating Rate, Preferred Equity, and Fixed Rate Loans with competitive pricing. Other advantages of private lenders include: not being boxed in by underwriting constraints such as debt yields for securitization and having the ability to fund loans that are “out of the box” for conventional lender underwriting requirements.
The term “private lender” does not always infer a more expensive lender or worse yet, a hard money lender. Private lenders play across the capital stack and price their risk accordingly. Recently, I closed a $25,925,000 loan on a newly constructed high-quality multi-family asset that was in the third phase of a four-phase deal. The client wanted maximum loan dollars and was motivated to pay off equity investors accruing a high “Preferred” return payment. However, the challenge was that the property was not fully leased, with a complicated shared amenities agreement, and had no operating history. The loan was placed with a private lender that priced at 395 basis points over 30 day LIBOR. This is just one example of the types of loans that can be structured with a creative private lender.
For clients facing loan maturity, or, looking for a construction loan or additional flexibility in structuring their capital stack, private lenders may provide competitive solutions.