For Bridge Lenders, Shades Of 2009 As They Provide Liquidity To A Frozen Market
Banks backing out of deals at the last minute. Opportunities for acquisitions, but only for those that can move quickly.
For companies seeking real estate capital, the last few weeks bear a striking resemblance to 2009, when traditional lenders froze up and deals began to fall through.
"Borrowers are in crisis mode, and they need to move quickly to refinance, recapitalize or salvage deals," said Mark Bahiri, managing partner and co-founder of Emerald Creek Capital, a New York-based bridge lender. "Unfortunately, the banks and traditional lenders are in crisis mode as well."
With his partner Mark Penna, Bahiri launched Emerald Creek Capital's first fund in 2009, when bank lending levels were at their most conservative in decades. The goal was to provide liquidity to the capital markets for real estate projects, helping the industry move forward and continue to transact while the financial infrastructure had otherwise shut down.
As the economy recovered during the last decade, Emerald Creek has become a standard-bearer for private lenders, now an indispensable thread in the fabric of CRE capital. But coronavirus has plunged Emerald Creek back into its first role as a lifeline to borrowers in a time of financial crisis.
Even as little as a month ago, banks were issuing loan commitments. Now, many banks are trying to retract the deals that they made. Some banks have simply stopped responding to their borrowers.
"We're seeing an uptick in requests on institutional retail and multifamily properties, where some banks have been stepping back," Emerald Creek Capital Managing Director Mike Cleaver said.
Cleaver described one borrower who was facing a maturing mortgage on a mixed-use building in Manhattan and was expecting a term sheet from his current lender to refinance the property. As the crisis deepened over the last few weeks, the current lender backed out. Emerald Creek has stepped up to keep that project alive.
To refinance a property, bridge lenders typically ask for a larger equity stake than a bank would. While a bank might lend at an 85% loan-to-value ratio, bridge lenders might ask a borrower to lower that exposure to 65%.
But the capital and debt service are also more flexible at a bridge lender. The large majority of deals that Emerald Creek is putting together include interest reserves, funds allocated as part of the loan that the lender initially draws down, allowing the borrower more time to stabilize cash flow before having to debt service the loan.
"You have to make sure the loan structure makes sense not just for the project but for the current economic environment," Bahiri said. "What was a fully stabilized retail center two weeks ago is a fully occupied but closed retail center today. We want to make sure that any deal going forward has ample time to play itself through and doesn't put any excess stress on the borrower to make interest payments."
Bahiri pointed to a $17M loan Emerald Creek just made on a condo complex in Prospect Heights, Brooklyn. The borrower had a maturing loan and wanted to recapitalize the condo inventory. Emerald Creek built in over one year of interest reserves to help the borrower through the current crisis without having to lose the property.
If the market falls further, opportunistic buyers may also come to bridge lenders to help them acquire distressed properties that are being sold at competitive rates. In the past, Emerald Creek has been able to come to the aid of borrowers who have made deposits on properties but have lost long-term funding. Buyers may be happy to put up a little more equity in order to save a deposit and transact on a project they believe in long-term.
Cleaver described how a broker recently approached Emerald Creek for a client acquiring a multifamily property in Boca Raton, Florida. The property was very well-located, but the previous lender had backed out of the plan to finance renovations when the crisis hit. Emerald Creek had the confidence in the project, and its own balance sheet to back the project.
"Relative to our competition, we feel we are in a much stronger position to weather this storm," Bahiri said. "All of our assets are located in core markets and construction liabilities are less than 5% of our balance sheet."
While the bridge lending space has become more and more crowded over the last few years, Bahiri said he was confident that Emerald Creek's experience in the space, and especially in a financial downturn, would help to see the company through the coronavirus crisis. He estimated that one-third of his firm's business comes from repeat clients and expects that recognition to carry the company into the future.
"For our existing portfolio, we understand that there will be some hardships due to the crisis, and we want to work with our borrowers and be good partners and good citizens," Bahiri said. "We also know that dislocations in the capital markets create opportunities, and there will be many win-win situations for borrowers and lenders. Those are the deals that we are focused on right now."
This feature was produced in collaboration between the Bisnow Branded Content Studio and Emerald Creek Capital. Bisnow news staff was not involved in the production of this content.