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Real Estate Journal — Fall Preview — September 28 - October 11, 2018 — 17C
M id A tlantic
C ommercial M ortgage B anking
By Brenner Green, Real Property Capital, Inc. Borrower Beware
r e c e s s i o n , m a n y a r - ticles were w r i t t e n about how the “Shadow B a n k i n g ” (read unreg- ulated pri- vate lending) W
hat is now a long time ago, in the depths of the great
ing one to explain… But it didn’t, and people started to notice. As the real estate market recovered, and then took off, the field in the Shadow Banking industry started to grow, and it grew some more. Spreads started to compress and fees went down. Terms eased, lenders started looking at smaller and smaller deals and developed an increased willingness to make heavy-lift repositioning loans and more construction loans. Today, it feels like nearly everybody with real estate finance experience in New York or Miami who has a
good buddy at a hedge fund or large family office is now open as a “lender.” In truth I was delayed in getting this article to print and glad for it because it gave me the chance to receive three cold solicitations from new bridge lenders this week. That’s one a day. Six months or so ago I was getting one such introduction a week. For the most part, banks are behaving rationally. Con- struction loans are being dealt out at reasonable leverage to accomplished sponsors. But the murky waters of the Shad- ow Banking industry pose
all kind of risk to borrowers and to the market as a whole. As a borrower, when diving into this world it is critically important to understand how your lender is capitalized and who is calling the shots. Many of these “lenders” are like brokers with only one source. They bring the deal to “the money” that backs them, after taking a loan applica- tion and deposit, and then it’s somewhat out of their hands as to what happens. And of- ten this doesn’t happen until what can be shockingly late in the process, after the lender has gathered all of their due
diligence. The risk of getting re-traded or turned down 30 days or more after signing a loan application is real. To put it bluntly the market is awash in this type of capital, chasing too few deals, and there are too many cowboys that are relying on others to do the necessary underwriting required to truly evaluate a deal the right way. The result of this is going to be a lot of upset borrowers and many bad loans put on the books. The silver lining, if there is one, is that this risk is now spread around all over the continued on page 22C
Brenner Green
sector was going to provide liquidity to markets, real estate and otherwise, when the commercial banks were unable to do so as a result of their tattered balance sheets, and I suppose to fill some of the gap for the 297 banks that failed in 2009 and 2010 (1) In the author’s view this prophecy never really came home to roost. We all know it was really hard to get a con- struction loan from a bank, but the banking system didn’t actually fail, and new players, like Investors’ Bank, who had never made any significant numbers of commercial real estate loans prior to the re- cession, came on the scene and grew their balance sheet to over $25 billion in assets presently from $12.7 billion at year-end 2012. They basically dominated this publication’s trade area in the multifamily space, and it was rumored that even the President and his son-in-law have real estate loans outstanding with them. This decision was great for the shareholders and great for the real estate economy, and there is nothing to do other than to tip your hat to the intrepid boards who made bold deci- sions in those tough years. Meanwhile, debt funds that were early to foresee things and had capital at the ready in the years from 2010-2013 made bridge loans and a few construction loans that turned out to be slam dunk deals at hard money pricing. Most of them leveraged their balance sheets with what was basi- cally free money (think about rates at that time) with lines from the very investment banks that created the morass in the first place. In other words, the banks that caused the problem were providing capital to people making com- mercial subprime loans rather than doing it themselves on their own balance sheets. Had it gone the other way that would have been an interest-
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Real Property Capital is a Philadelphia based full service commercial mortgage banking firm with a regional focus and national capabilities. Our business model emphasizes client satisfaction through a high-touch, analytical approach that distinguishes us from the competition. Learn more about our distinct approach and proven track record of success at www.realpropertycapital.com. FOR MORE INFORMATION: R. Brenner Green, President 303 Harry Street • Conshohocken, PA 19428 • 610-456-9644 • bgreen@realpropertycapital.com
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