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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2019

Nonbank Financing Can Get the Deal Done

When a loan transaction gets complicated, bridge lenders may offer a path forward

Illustration by Dennis Wunsch

Often, some of the best opportunities in real estate investment do not fit into the box of “acceptable” for many conventional lenders. These lenders typically prefer to follow well-worn checklists when contemplating a deal and may balk at the first signs of complexity.

When the path to adding value to an asset requires creativity and a thorough understanding of the unique traits of a property, a bridge lender can be the far better choice. A bridge lender that is willing to dive in and rapidly craft a tailored financing strategy for success is often the best choice for a commercial mortgage broker who is seeking a lending partner for a client.

This financing flexibility might even require a lender to evaluate and support a single deal involving two different types of assets in two different markets. Following is an example of such a transaction.

Innovative financing

A property-purchase deal involving two buildings in greater Atlanta called for the cross-collateralized financing of an aging mixed-use building and a woefully underperforming medical-office complex. The properties are located in separate neighborhoods.

The mixed-use loft-office and retail building is located in the Old Fourth Ward of Atlanta, which has become one of the hottest multifamily submarkets in the city. Most of the reposition-based acquisitions in the area involve ground-up multifamily projects, such as townhouses. Built in 1940, the 18,942-square-foot mixed-use building boasts original hardwoods, high ceilings, exposed brick and bountiful sunlight.

With financing from a bridge lender, a sponsor purchased the vacant building in June 2017 for $1.65 million,  a price far below market value. The sponsor then invested $200,000 to prepare the building for leasing. The tenants now include a restaurant and a hair salon. The property is currently 85.7 percent occupied. 

The sponsor’s other property was a medical-office complex about 15 miles away in an Atlanta suburb, Lithia Springs. It was a bit of a unicorn in that there were no similar competing products nearby, but the two buildings in the complex had been so mismanaged and neglected that would-be tenants were settling for flex space elsewhere for their medical practices. The medical-office buildings date back to the 1980s and hadn’t been painted for several years.

Still, the potential was evident. Several of the existing tenants expressed their desire to expand into vacant space in the 48,602-square-foot medical-office complex. The previous landlord, however, refused to offer any tenant-improvement allowances to help the tenants grow.

With the appropriate bridge loan, the new sponsor was able to set aside reserves to provide for tenant improvements and leasing commissions in order to capitalize on potential expansions. The sponsor is in positive negotiations with tenants. Currently, the complex is 76.4 percent occupied. 

Relationship lending

The Atlanta property deals illustrate an alternative- investment strategy that might scare off many conventional lenders. They simply would not be comfortable with the projects’ level of diversity, unusual nature and the detail required to justify aggressive financing support.

A bridge lender who has a granular understanding of the nature of an atypical asset, however, can confidently back a proposed financing arrangement at higher loan-to-value (LTV) and loan-to-cost (LTC) ratios — as much as 80 percent to 90 percent — than many  lenders would contemplate. The ability  to achieve such a comprehensive  understanding of an asset calls for  lenders who have sufficient backgrounds  in operating commercial real estate — such as asset management, leasing and sales — to evaluate a project’s strengths and challenges at a micro level.

In addition to flexibility, another advantage to working with a bridge lender is the speed at which they can provide funding.

With that knowledge, a good bridge lender has the confidence to give sponsors  credit for the sweat equity they will supply to make a project succeed. In the case of the Atlanta projects, the bridge lender recognized the sponsor’s depth of experience within that specific market and the sponsor’s demonstrated skills to execute its vision. The confidence the sponsor inspired encouraged the lender go higher in the financing stack than would normally be the case absent that relationship.

Such relationship banking is a strength of bridge lending. The days when developers had personal relationships with conventional lenders who would back nearly every one of their loans at as much as 90 percent LTC are long gone. Those relationships, however, are being built again in private institutions through bridge-loan capital.

Certainty of closing

The fact that equity is not easily obtained in today’s markets can present sizable challenges to pursuing a complex business plan. That’s where a bridge lender can step in. A private lender that is well-versed across markets and specific product offerings may be able to provide a variety of creative structuring solutions for unstabilized assets.

In addition, a bridge lender’s flexibility around timing and the ability to invest at higher levels in the capital stack than would be the case with a conventional lender provides the sponsor with a surety of execution that may allow them to ultimately protect and enhance their asset. In the end, a sponsor may find that working with a bridge lender is the best and most comfortable option available when structuring a challenging loan.

In addition to flexibility, another advantage to working with a bridge lender is the speed at which they can provide funding. Conventional lenders often require months to underwrite a loan, whereas private lenders can generally structure complex transactions within a week and complete the entire financing process in less than a month.

Through established relationships with sponsors and commercial mortgage  brokers, and significant available capital, a balance-sheet lender can handle a transaction under abbreviated timelines, offer certainty of closing and ultimately allow for the possibility of near-term recapitalizations that are intended to return equity to the sponsor.

•  •  • 

When a sponsor needs to move rapidly, or put together a plan for a complicated deal or unusual property, a bridge lender may provide the best options for moving forward.


 


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