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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2014

Lending Delays Ahead? Take the Right Exit

Bridge financing offers a viable backup when government funding falters

Lending Delays Ahead? Take the Right Exit

Savvy mortgage professionals know that having a backup plan for financing is essential in today’s lending environment. This is especially true when the first option for a loan is through a government-sponsored enterprise (GSE), as exhibited this past October during the government shutdown. Many government-backed loans ended up in limbo, leaving originators scrambling for alternate routes.

In the period the government closed down, the Small Business Administration’s (SBA) doors were shut. Any loan application submitted to the agency that had not been processed by midnight on Sept. 30, 2013, stayed in limbo until the shutdown was over. When the shutdown ended, the SBA, which averages $96 million per day in small-business lending, was sitting on a backlog of loans submitted in its period of closure, leading to inevitable delays in processing.

For some commercial borrowers with an urgent need to close their loans by the end of the year, waiting simply was not an option. Many real estate investors with commercial acquisitions had large earnest-money deposits at stake or other contractual obligations to be met by this past year’s end, while small-business owners with inventory needs for the Christmas season faced the prospect of being left out in the cold.

When the government agencies shut their doors and the backlog of government-backed loans began building, many of these borrowers were forced to quickly seek out alternatives for financing.

Alternatives

Commercial mortgage brokers, with government-backed loans temporarily in limbo, aggressively sought out bridge-loan alternatives during the shutdown to get their deals closed by year’s end. Commercial bridge lenders, often called hard-money lenders, provided a fast funding alternative for many of these brokers and borrowers left in the lurch from the shutdown.

Bridge lenders nationwide saw a substantial spike in commercial loan applications in the last quarter of this past year. How much of this deal-flow avalanche was a direct or indirect result of the government shutdown is difficult to quantify, however.

In any case, bridge lenders stepped up to fund not just commercial real estate but all types of business loans, for which year-end operating-capital needs may have meant the difference between success and failure for many business owners. During the shutdown, some bridge lenders even offered special loan programs for borrowers who were already approved for SBA funding in the form of three-to-six-month loans with fast-track underwriting and approval processes.

Although bridge loans are priced higher than traditional bank loans, bridge lenders can fund loans in weeks, versus the months it may take for government loans, even when there is no shutdown to contend with.

Many commercial mortgage brokers probably wished they had a bridge lender on speed dial during the shutdown, particularly for those short-fuse deals that couldn’t wait. Regardless of the circumstances, having a bridge lender waiting on the sidelines to fund a transaction in limbo can be a lifesaver for a deal that might otherwise be deemed dead.

Finding lenders

When financing falls through at the last minute, it is crucial to have quick access to a trusted bridge-lending source. For borrowers and brokers who didn’t have a backup plan for financing lined up during the shutdown, the search for the right bridge lender on short notice may have been a daunting task.

With the commercial bridge-lending space prone to bogus and predatory lenders, finding a last-minute source of financing is particularly difficult and risky if you don’t know what to watch out for. The process of weeding through the upfront-fee scams and predatory loan offerings of some unscrupulous private-money lenders may feel like a full-time job to a commercial mortgage broker who hasn’t worked previously with bridge lenders.

Beware of lenders that underwrite their loans like a bank, take a long time to provide final loan approval and then charge gouging interest rates and loan fees. There are many bridge lenders that claim to offer flexible underwriting and fast fundings. But once the borrower is locked in, they may change the loan terms, demand more documentation and collateral than is typical. They even may require borrowers to come up with more equity at the last minute to lower their loan-to-value (LTV) exposure. Predatory bridge lenders also have been known to lock in a borrower with an exclusive letter of intent and an exorbitant upfront fee so that person is left with no other options.

Don’t let this happen to your borrowers. Find several bridge lenders that you know and trust, figure out their processes and procedures, and be ready to use them on short notice. In today’s lending environment, having several bridge lenders readily available in crunch time for any deal is essential for success.

CMBS challenge

Now that the government shutdown is a distant memory, many commercial mortgage brokers have returned to business as usual. But there may be another challenge yet on the horizon that necessitates a bridge-lending backup plan.

According to a Trepp report from this past December, an estimated $346 billion in commercial mortgage-backed securities (CMBS) loans will mature between 2014 and 2017. As a result, a massive wave of refinances could present a new set of challenges for commercial lenders.

Many of the CMBS loans originated between 2005 and 2007 were 10-year loans. Furthermore, these loans typically were aggressively underwritten with high LTV ratios and originated at a time when property values were skyrocketing. This means that many of these properties are overleveraged, so borrowers looking to refinance probably won’t be able to meet current LTV requirements without bringing cash equity into these properties.

This problem is expected to affect industrial and retail properties more than office and lodging spaces, and have a lesser effect on the multifamily sector. This assumption is dependent on increasing commercial real estate values and low interest rates. Because commercial bridge lenders typically lend at much higher LTV ratios than bank lenders — and are willing to lend on vacant and distressed assets — many of these maturing CMBS loans will be refinanced by bridge lenders.

Location also will play a huge role in a property’s likelihood to be refinanced. Because the recovery of the commercial real estate market is tiered, many commercial lenders are cherry-picking properties that are located in top-tier markets, and often will not lend on anything else. Commercial bridge lenders, on the other hand, will look at properties in second- and third-tier markets, where many commercial real estate investors are focusing their investing activities in search of new opportunities this year.

• • •

With the systemic risk and uncertainty that may affect commercial lending, particularly in the GSE sector, a backup plan for financing is a must. And with so much competition for low-cost government-backed loans — and the ongoing uncertainty about their future — commercial mortgage brokers should be able to present multiple financing options for their borrowers this year and beyond, or risk losing them to their competitors.  


 


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