The Owner Perspective – Business Observer


Tn spring, a few months after the start of the COVID-19 pandemic, real estate firm Arch Companies was looking to line up interim financing as part of a deal for an apartment complex it was looking to acquire.

Getting the loan wasn’t a problem, but setting terms favorable enough to make the deal work was, recalls Jeffrey Simpson, Managing Partner of Arch.

“We had a bridging loan, but the terms kept changing,” he said, noting that although the seller of the property had not lowered their expectations to adapt to their new environment, the lender now offered a lower amount than a higher amount. rate.

“I don’t think the lender was wrong to adjust their terms, but we just couldn’t do it in pencil,” Simpson said. “So we said, no thanks.”

After an initial loan freeze after the first days of the pandemic, bridging lending activity has thawed considerably. Bridge lenders, however, are still more picky about which sponsors and projects they lend to and charge higher rates than they were before the pandemic.

“When the pandemic started, most lenders were looking at their books and really understanding the exposure they had,” said RXR Realty president Michael Maturo. “Not much was happening in terms of the bridging loan. Things kind of consolidated pretty quickly.

More recently, “the banks, some of the funds, have opened up and started lending again,” Maturo said. “So now you have lenders making bridging loans on new deals, but generally to borrowers that they have a relationship with, that they are comfortable with. So it’s a small group.

One of the factors behind this selectivity is that bridge lenders are not as easily able to securitize part of their loans as they could before COVID, Simpson noted.

“Most people in the bridge business have some sort of warehouse, CLO, REIT, a way to lay off a significant portion of their bridge,” he said. “When COVID hit… cash ran out very, very quickly; and for the groups that had these warehouses and the means to lay off a lot of their bridging loans, it became very difficult very quickly.

Some bridge lenders simply stopped lending, Simpson said, while others continued but also became much more selective. “And, in almost all cases, [bridge debt] became more expensive overnight, as the amount of funding these bridge lenders could get immediately plummeted as the banks pulled out of warehouses and said, “Hey, we better get more conservative.”

Daniel Ridloff, director of Slate Property Group, said he has seen competition among other bridge lenders decline during the pandemic, mirroring the narrowness seen by Simpson and Maturo.

“The deals that we looked at nine months ago and loved in that bridging capacity, we were one of 10 bidders to bid on for funding,” he said. “And I would say for the same type of deal profile today, we’re one of three.”

Ridloff noted that Slate’s lending platform has traditionally targeted residential development primarily, which has kept it out of areas like hospitality or offices that lenders are currently wary of.

In particular, he said the company felt the focus on building loans from scratch was well suited at the present time, as the market will have had some time to recover before units in. start-up courses don’t start to rent or sell.

“I think for the first time in real estate, at least in my life, a completed building doesn’t necessarily have more value than a property under construction,” Ridloff said. “Normally you would never say that. But, you would almost rather be in development now and delivering in two years than being full now and having to rent during those times. “

Simpson said that in the 12 months leading up to the pandemic, Arch borrowed about $ 100 million in bridging loans to purchase multi-family apartments in the Southeast. As Commercial Observer previously reported, in December 2019, the company secured $ 61.5 million bridge financing from Walker & Dunlop to acquire a portfolio of 1,125 apartments in four buildings in North Carolina and Carolina. South, with plans to renovate units and replace the bridge. debt with permanent debt backed by Fannie Mae. In October 2019, Arch entered into a $ 34 million bridge financing from Walker & Dunlop to purchase a 692 unit apartment complex in Jacksonville, Florida.

Simpson said Arch took out a $ 55 million bridge loan several months ago as part of a joint venture, but added that the company has considered and forwarded a number of other agreements for the debt. -relay.

“We looked, we even were conditional on the bridging loans, but we didn’t actually shut them down,” he said.

Simpson said Arch is currently working on a “hundred million dollar” deal that requires a bridge loan due to vacancies caused by what he described as a combination of partnership and pandemic issues. .

Generally speaking, “the bridge lenders are very reluctant to make this loan”, he said, but added that the company had approached a lender “who knows us, trusts us, with whom we have already executed, and they seem quite open-minded to work with us on this deal.

In contrast, sponsors who do not have a solid track record with a borrower may struggle to find bridge financing.

Michael Lefkowitz, a managing member of the Rosenberg & Estis law firm, said less established developers who launched projects before the pandemic are struggling to find interim funding, due to concerns about the quality of the projected value. of these developments. – COVID world.

“These deals started to be planned in 2017, and started to be built in 2018 and 2019, and looked to sell in 2020,” he said. “And, you know, you had a few things going. Before COVID, you had a luxury condo market that was slowing down, and then COVID hits, and you really have something that nobody expected, in terms of a very drastic reduction in the number of deals that happen in that market. “

This has led to situations where the underlying collateral may not support the debt a developer seeks to incur, Lefkowitz said. “And, if the collateral package hasn’t supported the debt at a lower percentage, it won’t support it at a higher percentage.” So it’s not really a question of, I will take more risks for a higher LTV; that’s it, I don’t know if I’ll ever make it if I lend you this money at any interest rate. “

To complicate matters, no one can say exactly what kind of market awaits us on the other side of the pandemic.

“The counter is that there haven’t been a lot of new starts,” Lefkowitz said. “So I’ve heard that it’s not like a new inventory is going to be added on top of the inventory already available, because there has been a real blockage in the number of new builds.”

Michael Gigliotti, senior managing director of JLL Capital Markets, said that while bridge financing can be expensive, it is available even for difficult properties.

“Say you have this kind of really tough scenario, where someone had a loan due and needed a bridge loan right now, and it was a really tough situation in, say, Manhattan with low occupancy. on a multi. Is that going to be a tough deal? Are they going to have to go to a high cost of capital? he said. “Yes, absolutely. But I still think it could be done.

Dustin Stolly, vice president and co-head of capital markets debt and structured finance at Newmark, said that while multi-family, industry and life sciences are the main areas of focus for companies bridging credit, even sectors like the hospitality industry – that pet peeve of the COVID economy – had started to attract interest from lenders puzzled by the new lower valuations in the sector.

“Hospitality values ​​are reset almost immediately,” he said. “And, they are often [down] 25 to 35 percent. And so, with that in mind, if there are opportunities for people to come in and provide rescue capital, or if there are sales of hotel investments … this is a space where finance companies can achieve a good relative return.

Like Simpson, Gigliotti said he thought the warehouse and secured loan bond (CLO) markets that many bridge lenders used to securitize their loans had gotten “a little weird” last spring. But, he added, since then, “they have come back quite strongly”.

Generally speaking, he said he believed that most sponsors who could have gotten a bridging loan a year ago could still get one today, albeit at prices around 100 points. more expensive than before. Bridge debt on riskier assets is more expensive.

“There are some very difficult transactions to close which, a year ago, any debt fund would have done at 3% which are now [getting done] at 6, 7 or 8 percent, ”Gigliotti said. “There are debt fund groups that will lend on these things and just make a return on them right now. And, if a borrower has to make a transaction and they need to take that money, they will. “

Of course, there are exceptions. “If this is a commercial building where all the tenants don’t pay rent, but their leases are running and you can’t evict them, yes, I don’t know if there is a loan. for that right now, ”he said.

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