Last week I wrote a blog about how historically aggressive private money commercial bridge lenders are getting.  This month George Smith Partners, the big commercial mortgage banking company (the original founder started George Smith & Company decades before I founded Blackburne & Sons forty years ago) released a newsletter, FinFacts, containing the following tombstone:

“George Smith Partners (“GS P”) placed a $10,900,000 non-recourse loan for the refinance of an underperforming stabilized 50-unit multifamily community in Los Angeles.  The Sponsor recently acquired the asset at approximately 50% below market from an affiliate party, and GSP was able to facilitate approximately $3,000,000in cash out proceeds at closing.”

“A portion of the loan proceeds will be used to renovate units as they become vacant in order to achieve current market rents.  GSP identified a non-institutional lender (private money lender) who was comfortable with the cash out proceeds and who understood the history and dynamics of this non-arms-length acquisition.  The non-recourse loan is fixed for 1.5 years with a 7.99% interest rate and 4.99% pay rate.”

Terms:

Interest Rate:  7.99% with 4.99% pay rate
Term:  18 months
LTV:  70%
Recourse:  Carve-Outs Only
Fees:  1.0%
Prepayment:  None; no exit fee

The reason I brought this closing to your attention is because the Big Girls (the originator of this commercial loan at GSP was a lady) are arranging large commercial bridge loans with less than interest-only payments.

Article Provided By By George Blackburne

Another Great Recession might be on point.  The mainstream business media picked up the same theme on Thursday and Friday, as the Dow lost ground. There will be some severe economic consequences from the coronavirus.

Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes.  The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China’s workers.

And the thing is, many of these small Chinese companies manufacture parts for American companies.  As a result, the worldwide supply chain has been shaken.  We can’t manufacture our own high-value goods without many essential parts coming from China.  Container ships coming in from China are coming back only 25% full.

Clusters of COVID-19 are now out of control in South Korea (602 cases, 3 deaths), Japan (135 cases, not counting cruise ships), Italy (132 cases), and Iran (43 cases, 8th deaths).  A worldwide pandemic is a virtual certainty.

I am writing this article on Sunday afternoon.  It will be interesting to see if the U.S. stock market get hammered on Monday.

Now on today’s training in commercial real estate finance.

In this week’s FinFacts, a superb, free publication of George Smith Partners, one partner, after returning from this year’s Mortgage Bankers Association Commercial Real Estate Finance (“CREF”) Conference, wrote about the competitiveness of bridge lenders:

“Bridge Lenders:  Floating rate bridge loan spreads used to be stratified, ranging from 2% to 6% over LIBOR, depending on the transaction dynamics.  That’s so 2017 (the old days).  Now there’s a race to the bottom occurring, with lenders bunched up at 2% to 4% over LIBOR.  More and more of them are pushing to the bottom of that range.”

“So how do lenders differentiate themselves?  Deal structure, credit officers are casting a wider net (One lender even remarked: We will do some funky stuff), source of capital (mortgage REIT vs CLO execution vs leveraged debt fund), flexibility, certainty of execution (we met with senior committee members that stressed their lean and efficient approval process), and borrower costs (exit fees can be waived).” and increased leverage.  Lenders are more willing to listen to stories.  For  example:  We will look at heavier risk for strong sponsors.”

“Also, more heavy bridge loans (major renovation, unoccupied properties) are being priced almost like light bridge.  As one lender remarked: No cash flow, no problem, for the right deal.  Geographic:  Secondary and tertiary markets are being considered, and the right deals are being priced tightly.  Yet many high-yield lenders are still in business, now offering high-leverage, non-recourse construction loans or going very high up the capital stack.  The net needs to widen as nearly every lender indicated that their marching orders are to increase production over 2019.”

Okay, so what on earth is the difference between a heavy commercial bridge loan and a light commercial bridge loan? A light bridge loan is where there is only some minor renovation and/or the property is a proven location.  You may be able to negotiate a bridge loan at just LIBOR plus 2.0% or LIBOR plus 3.0%.

Examples of Light Bridge Loans:

1. You just found a good tenant for your standing office building, but you need $350,000 to pay for tenant improvements.
2. Your borrower’s restaurant has been a money-maker for 20 years (proven location), and the borrower needs another $1 million to expand his seating capacity by another 35 tables.

A heavy bridge loan is one involving substantial construction and/or market risk.  If you can even find an interested bridge lender, you may have to pay as much as LIBOR plus 4% or even higher.

1. 1. You are converting an old hotel to student housing.  All kinds of problems happen when you open the walls of older buildings (termites, asbestos, illegal wiring and/or substandard plumbing).
   2. You need $1.5 million to convert an existing, vacant retail building to a restaurant, and there is no guarantee that the market will appreciate a restaurant in this particular location.  Maybe the people located in the surrounding area don’t make enough dough to dine out often.  Maybe the new restaurant has inadequate parking or is hard to negotiate by car.  We have all seen restaurant after restaurant fail in the same location.
   3. You are converting the shell of a failed big box retail store to self storage, a popular adaptive re-use.  That’s more than a trifling of construction, plus you have risk that people don’t like two-story self-storage buildings.

P.S.  I wonder if the Chinese Communist Party (“CCP”) will survive this crisis.  The average Chinese citizen despises the tight control of the CCP, but they tolerate it because the CCP has been improving their lives annually.

What happens when the growth rate in China plummets from 6% to 7% annually to a negative number?  The largely-peaceful protestors in Hong Kong taught the Chinese people how to bring a government to its knees.  Think this is a far-fetched scenario?  Everyone was shocked at the speed at which the Russian Communist Party lost power.  Could beautiful young Chinese girls soon be sticking flowers into the gun barrels of surrounding Chinese soldiers?

Most of you are too young to remember this, but when Russian soldiers and tanks surrounded the Russian pro-democracy protestors in 1991, led by Boris Yeltsin, some beautiful Russian girl started sticked flowers in to the gun barrels of the Russian soldiers.  In less than an hour, the surrounding Russian army brigade changed sides and pointed their guns outwards, protecting the protestors.

Boys are so easy.  🙂

By George Blackburne

Some more green shoots are visible as the bridge lenders are starting originations also.  The warehouse lending market (big banks lending to debt funds) has started up again, with more cautious leverage.  The warehouse lenders will also monitor loan collateral more closely.

The difference between a commercial mortgage banker and a commercial mortgage banker is that commercial mortgage bankers service many of the loans that they originate, normally for life companies.

The money in commercial real estate finance (“CREF”) is in loan servicing fees.  As I often say, “It’s the loan servicing fees, silly.”   An easy way to remember this is that mortgage bankers are rich, and mortgage brokers are poor.  Want to start earning huge loan servicing fees?

So where do debt funds get their dough their large commercial bridge loans.  We are talking here about bridge loans from $5 million to $100 million.

The general rule is that the sponsors of a debt fund will put up several million dollars of their own dough.  Then they will go out to wealthy individuals that they know, using a private offering, to raise, say $200 million.  They will make, say, $160 million in bridge loans.

Then they will go to a commercial bank and pledge the first mortgages in their portfolio for a $200 million to $250 million line of credit, giving them $400 million to $450 million in lending capital.

As the debt fund makes a profit, some of the earnings are retained as equity, giving the debt fund the ability to borrow even more.

But where do the sponsors of the debt fund go to raise their original $200 million?  Who invests equity into a debt fund?  The answer is mostly wealthy investors, family offices, hedge funds, and opportunity funds.

But what is a hedge fund?  A hedge fund is a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.  Investopedia defines a hedge fund as an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.

There are two cool things about a hedge fund.  First of all, these public offerings do NOT have to be registered with the SEC.  Registration is a phenomenally expensive process, required before a company can go public, that involves extensive audits going back several years and immense legal documents.  The process can take almost two years, and the up-front cost is well in excess of $1 million  There are also ongoing legal costs of another $1 million per year.  Yikes.

Now remember, hedge funds do NOT have to be registered.  Why?  Because every investor in a hedge fund needs to an accredited investor, i.e., have a net worth, exclusive of his personal residence, of at least $1 million.  The SEC assumes that accredited investors are either smart enough to understand the risk or can afford to pay an advisor.

The second cool thing about a hedge fund is that a hedge fund can publicly advertise for more investors.  They just need to make sure that every investor is accredited.  This freedom to advertise is a huge deal.

So what is an opportunity fund?  An opportunity fund invests in companies, sectors or investment themes depending on where the fund manager anticipates growth opportunities.  In plain English, the manager invests wherever the opportunities lie.

Important note:  Opportunity funds often buy shares of stock in companies, known as equities.  In contrast, most hedge funds invest primarily in debt instruments.

Another difference between a hedge fund and an opportunity fund is that hedge funds investments are not publicly-traded investment instruments.  Opportunity funds, in contrast, are public offerings, offered to the general investing public.  In other words, you don’t have to be accredited to invest in an opportunity fund.  Interests in opportunity funds are typically offered by insurance plans, mutual funds, and other investment firms.

Some opportunity funds focus on real estate itself, REIT’s, and real estate debt instruments, such as mortgages, debt funds, mezzanine debt, and preferred equity.

Another concept to grasp is the concept of one fund investing in another fund.  A hedge fund might invest in a debt fund.  An opportunity fund might invest in a debt fund.  Therefore most debt funds are a fund of funds.

Now where the debt fund makes its dough is that it can often borrow for as little 3.5% to 4.0% and then make loans at 6% to 9%, plus loan fees.

Clearly debt funds are leveraged, and if the bank holding its credit line gets freaked out and calls its line of credit, the debt fund could be forced into liquidation.  The recent report by George Smith Partners that the warehouse lending market is loosening up is great news for debt funds and the availability of large commercial bridge loans.Commercial Mortgage Rates Today:

Here are today’s commercial mortgage interest rates on permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.

Be sure to bookmark our new Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four HUGE databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance (“CREF”).

By George Blackburne