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As some banks sit in the dugout amid late-inning economic concerns, alternative lenders are stepping up to the plate in commercial real estate.
While some systemic regulators might bemoan “say it ain’t so, Joe”, many are glad to have these “shadow banks” re-emerge. CBRE notes that alternative lenders have raised record amounts of capital for secondary financing and transitional property lending. And while commercial real estate underwriting should stay balanced in 2019, CBRE says, this infusion of capital could exert upward pressure on loan proceeds and underwriting standards.
What’s driving this? Ironically, it’s as much the banks themselves, as the alternative lenders. Commercial Observer comments that more than a decade after the 2008 crisis, some banks remain cautious when it comes to financing commercial real estate. They add that banks are especially wary of new construction financing, which has resulted in more developers becoming lenders themselves.
In other words, it’s a whole new ballgame in commercial real estate lending, with alternative lenders apparently ready for extra innings. Although many of the lending institutions themselves are rookies, they’re usually staffed by members of veteran teams in commercial real estate.
For instance, New York-based real estate developer and manager Silverstein Properties Inc. — whose marquee projects include 3, 4 and 7 World Trade Center — launched a joint venture last September to extend financing for office, industrial, residential and retail properties in growing urban markets across North America. Silverstein’s capital partners are two global institutional investors.
Silverstein Capital Partners provides senior loans, bridge loans, subordinate loans and rescue capital for ground-up construction, value-add repositioning, lease-up and land projects, as well as inventory loans for condo projects. Loans start at $25 million; there’s no cap on loan size.
“The genesis of the lending vehicle is a response to the increasing need in the capital markets for sophisticated lenders who both understand the complexities of development and can act quickly to provide efficient capital to sponsors,” Silverstein Capital Partners says on its parent company’s website.
Joining Silverstein in the field of alternative lending is New York-based real estate developer Naftali Group LLC. Naftali Group recently set up its debt fund subsidiary, Naftali Credit Partners. The fund specializes in high-yield mezzanine construction loans.
In October, Naftali Credit Partners closed on a $50 million loan for construction of 145 Central Park North, a 13-story, 37-unit luxury condo project in Manhattan. Naftali Credit Partners sourced the senior loan and brought aboard Israel Discount Bank as its financing partner. And in March, Naftali Credit Partners closed on a $65 million loan for a 10-story, 74-unit luxury condo project in Queens. Naftali tapped CIT Bank as the senior mortgage lender.
“The [debt] platform established at Naftali Group underscores the value of private investing backed up by the sector-specific experience necessary to navigate the complexities of the New York City real estate market and effectively mitigate risk for all parties,” David Hochfelder, executive vice president for acquisitions at Naftali, said when the $50 million loan was announced. “As capital continues to seek yield in an active market, informed risk management will become increasingly critical to maintaining loan quality.”
Yet another relatively new alternative-lending player is New York-based real estate developer and manager The Moinian Group. Its financing unit, Moinian Capital Partners, in April provided a $119 senior loan and $23.5 million mezzanine loan for an apartment high-rise in Miami.
The 43-story, 434-unit Luma apartment tower is at the heart of Miami Worldcenter, a 27-acre, $4 billion mixed-use development that promises to jazz up downtown Miami. Moinian and ZOM Living are developing the apartment project.
Moinan Capital Partners, founded in 2017, targets apartment properties in gateway cities, along with hospitality, office and retail assets.
So, why are borrowers seeking out alternative lenders in the commercial real estate space?
Well, for one thing, nonbank lenders tend to offer better terms than traditional lenders do. Secondly, nonbank lenders face fewer regulatory restrictions than traditional lenders do. Often, traditional lenders balk at going above loan-to-value (LTV) ratios of 60%, whereas alternative lenders might go as high as 75% to 80%.
“Nonbank lenders have provided a viable alternative for commercial developers for the last few years after banks left a door open when they tightened their standards,” Construction Dive reported in 2018.
One of the most striking demonstrations of nonbank lending as a viable alternative is the recent raising of a more than $1.1 billion debt fund by New York-based alternative lender Madison Realty Capital. Now, Madison Realty Capital has more than $4.5 billion in financing capacity.
The new fund — the firm’s fourth — originates and acquires commercial mortgage loans, mezzanine loans and preferred equity interests. Last year, the firm originated $2.5 billion in deals, including a $100 million construction loan for a condo development in Brooklyn, according to Commercial Observer.
Also in 2018, Madison Realty Capital expanded to the West Coast with the opening of an office in Los Angeles — its first outpost outside New York. In the 15 years since its establishment, the firm has closed more than $10 billion in debt and equity deals.
“We saw a real need for our special-situation financing. We found that it’s a growing market, a very diverse market, with very few capital advisers that do what we do here out there,” Josh Zegen, co-founder and managing principal of Madison Realty Capital, told Commercial Observer. “Looking back, our thesis was true.”