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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2018

The Right Financing for Your Deal Is out There

Finding new sources of capital in an evolving market is a challenge that can be met

c_2018-03_kadish_spot.jpgCommercial banks may be tightening their lending standards, but capital is still available if you know how and where to find alternatives. Many banks are being conservative because of leasing challenges and fears of oversupply in some markets — particularly with respect to market-rate multifamily construction in downtown locations.

At this stage of the real estate cycle, having a vast network of nonbank financing sources that will lend on a national basis is necessary to meet the varying needs of a diverse client base. The challenge for commercial mortgage brokers is to match sophisticated lenders with the financing requests of borrowers for any acquisition, redevelopment, construction or permanent loans, regardless of the location. Mortgage brokers need to be prepared to look outside the market where the property is located and work with lenders such as private equity players, family offices, debt funds and life insurance companies.

To make these deals happen, you may need to convince investors of the appeal of a submarket or make a case for a new loan type. Following are some hypothetical examples that demonstrate the types of nonbank or out-of-market financing sources that can help mortgage brokers and their clients close more deals.

Out-of-town redevelopment

Challenge: An investor seeks financing for a redevelopment in another market. Traditional bank lenders are oversaturated in this market or are cautious of an investor that doesn’t have deep relationships there.

Solution: Match out-of-state developers with out-of-state financing, such as a debt fund or life insurance company. When neither party has preconceptions about the market, a strong pro forma backed by research and results in other markets is essential for the investor to evaluate the deal.

In addition to debt funds, life insurance companies are another avenue for borrowers to access capital. Life companies have played a role in funding high-quality, low-leverage deals for many long-term property owners. With fixed-income investments stagnating, life companies are seeking ways to increase returns and balance traditional investments, and are increasingly turning to real estate investments.

New construction

Challenge: An active developer that has other existing projects financed with middle-market banks needs financing to complete a new construction project in one of the hottest development areas in the country. Traditional in-market lenders have filled their quota of new-construction lending in this market.

Solution: Post-recession, cities on the coasts and other major markets — including San Francisco, Seattle, New York, Chicago, and Austin, Texas — have experienced a building boom, particularly in the multifamily sector. When developing in a super-hot market location, local lenders may be hesitant to increase supply where lots of other projects are going. This requires nonbank or out-of-town lenders.

A union-sponsored pension-fund advisor may be willing to provide a 75 percent loan-to-cost (LTC) advance at a time when commercial banks have pulled back to advance rates in the 60 percent LTC range. Sourcing the loan from a nonbank lender allows the borrower to use local banks for other projects in the pipeline.

When the capital pipeline seems to be turned off, exploring new product types may turn it back on. 

Another option could be out-of-market banks, which do not have a large number of multifamily construction loans on their books, or none in the market where the development is. Yes, banks are tightening their construction-loan allocations, but an out-of-market bank may be willing to finance a project in a market with good fundamentals where they don’t already have exposure.

One way to draw interest in a hot market is to offer something different from others seeking financing. A project that offers micro-units or affordable housing in a market with a housing shortage is one example. Another might be a project located outside of a downtown area, but in an area ripe for growth.

Low-liquidity or foreign owners

Challenge: A borrower that is asset-rich and cash-poor is having difficulty obtaining refinancing because of banks’ stringent liquidity requirements. Additionally, the property has appraised for more than the original loan and needs funds to complete some construction.

Solution: Look to a private lender that offers one- to five-year bridge loans and lends on a national basis. Some bridge lenders will offer 20 percent cash out, and these bridge loans can help complete repositioning that allows for leasing and increased cash flow.

Challenge: A foreign-national client seeks financing for projects in secondary markets involving small to midsize value-add deals for various property types. Many lenders are unwilling to go to a tertiary market for a foreign-national borrower, and an array of product types adds to the complexity.

Solution: Arrange acquisition financing through debt funds, including international sources, and permanent financing through commercial mortgage-backed securities (CMBS) lenders. International funds are seeking deals in secondary U.S. markets and will not be weary of foreign owners.

To make complex deals happen, don’t be shy of aggressive timetables. Having time limits on financing assignments keeps all parties focused on meeting the necessary closing dates.

Nontraditional products

Challenge: Investors and lenders are shying away from projects because a market is oversaturated with new construction and vacancies or concessions are increasing.

Solution: When the capital pipeline seems to be turned off, exploring new product types may turn it back on. Deals involving senior housing, student housing, mixed-use properties, warehouses and self-storage facilities, and manufactured-home communities may get a second look from financing sources.

The financing of manufactured-home communities, or what were commonly known as mobile-home parks, is evolving from mom-and-pop owners to more sophisticated multi-state investor owners. These owners needed acquisition financing, bridge loans and permanent loans to acquire, renovate and expand, and have received it from sources such as CMBS lenders, agency lenders and banks.

•  •  •

The bottom line: Traditional midmarket banks may be slowing the flow of construction capital, but nontraditional lenders are still looking for attractive deals to diversify their holdings. If a project has the right fundamentals, a savvy mortgage broker should be able to connect to debt and pension funds, CMBS lenders and out-of-market banks that are looking to invest — no matter where or what type of project it is.


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