A Tale Of Two Lenders: The Battle Wages On Between Banks And Nonbanks
Recapitalized banks are swimming in cash and itching to take on solid deals — but they are having a hard time elbowing out the competition.
Post financial crisis-era regulations are still holding traditional lenders back from offering borrowers the most competitive packages, causing the market to bifurcate significantly between bank and nonbank lenders and the type of projects each group services.
It is not so much a question of specific asset type (multifamily versus hotel or retail). According to HALL Structured Finance President Mike Jaynes, banks are willing to take on a diverse portfolio of projects, but whether they are willing to finance a specific project depends on many factors — including cash flow, risk, internal appetite and regulations.
Jaynes said that banks still have a heavy appetite for lending to cash-flowing assets like established multifamily or hospitality projects, but they are not biting on non-cash-flowing assets like construction loans regardless of the project type.
This is driving borrowers to nonbank lenders like HALL Structured Finance, and according to Jaynes, the force behind this shift toward nonbank lending is a combination of strict bank regulations, like the Dodd-Frank Act, and the subsequent reduction of available debt.
“What we have seen since 2010 is … [non-regulated lenders] are becoming more and more cost-effective as the availability for [construction loans] shrinks,” Jaynes said.
Banks Duke It Out For The Same Deals
As borrowers ask for more risky money and regulations remain unkind to risk, banks are now having to fight it out for a smaller number of low-risk deals and borrowers with stable cash-flowing assets.
“Banks are vying for the same pool of strong borrowers. Borrowers, in general, are being more opportunistic and trying to take advantage of market opportunities, which can result in more ‘complex’ scenarios and figuring out how to make it work,” Invested Advisors founder and CEO Crystal Sargent said.
Complex is a nice way of saying risky, and right now, banks do not like risky.
The result, according to Sargent, is that four or five banks at a time can be fighting for the same deal because right now there is not enough overlap between what banks want and what borrowers need.
“There [are] still institutional banks out there that are certainly providing construction financing, but the ones that are are doing it on a more limited basis … and then some are just completely out,” Jaynes said.
Of the banks still doing construction loans, their exposure is low. Many banks only lend for construction and development projects if they have a pre-existing, strong relationship with the borrower, according to Jaynes.
In terms of numbers, this bifurcation of the market breaks down into a matter of loan-to-value and/or loan-to-cost ratios and rates.
Jaynes said his group will go up to 75% LTC on a project whereas the banks they compete against often will only go up to 60%. The flip side is that rates for nonbank lenders like HALL Structured Finance are higher than bank rates. HALL Structured Finance runs an 8% to 9% spread, whereas the typical bank runs a 5% to 6% spread.
Jaynes said the purpose of nonbank lending is to fill out the capital stack, allowing developers to get their projects off (or on) the ground. But afterward, as time goes on, these projects should graduate to a level where banks would consider financing them — meaning banks could start to see an increase in lending activity once some of these projects mature.
"A developer, to get their project built, [must] get it stabilized [to] fit into a category that a bank would be interested in — that is now a stabilized, cash-flowing asset to refinance," Jaynes said.
CORRECTION, DEC. 11, 5 P.M. CT: A previous version of this article misrepresented Mike Jaynes' title. He is the president of HALL Structured Finance, an entity under HALL Group's banner.