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When It Comes To Leverage, Smaller Banks Can Offer Large Returns For Less Risk


One thing keeps major debt funds operational: leverage. The largest debt funds in the country rely on money center banks to help them leverage their mortgage positions, but that relationship can come with complications. 

“Large debt funds that use leverage will do so in the form of a repurchase agreement or ‘repo’ lines,” said Solomon Garber, senior vice president of business development at Northeast Bank. “This type of leverage has the potential to cause chaos within a fund, especially if a negative macro event like the pandemic occurs.” 

While this scenario is something most large debt funds have no choice but to reckon with, smaller private lenders may have more flexible options. These lenders can turn to organizations like Northeast Bank, a Maine-based bank that offers lender finance services nationwide. It is one of the few banks of its size with an in-house lender finance operation that provides leverage to real estate lenders and loan investors across the country. 

Northeast Bank does not take a repo line approach to its lender finance relationships. Instead, Garber said the company charges a little more for its money, but what lenders get in exchange are strong returns for less risk. 

“We’re not one of the large shops that charge 2% or 3% for their money, but then have all the rules and restrictions and margin call abilities that can work really well when the market is strong, but can get lenders into trouble if the tide turns,” Garber said. “This is a risky structure, and we offer something different, and that is individually designed structures to fit each deal best.” 

He walked through a hypothetical deal the bank might take on: A private lender can originate a $10M loan on an industrial property at an 8% unlevered return; however, the investors are seeking net returns of 10% or more. The private lender will approach Northeast Bank for leverage in the form of a loan-on-loan. Northeast then assesses the property, determines it’s worth $15M and offers the lender a $6M loan at 6%. Now, the lender is only paying 6% on the first $6M of the $10M loan while charging its borrowers 9%, plus a 1.5% origination fee, allowing it to deliver its investors a 17.25% return. 

Northeast Bank is uniquely positioned among smaller banks to handle these often complex deals because of the bank’s expertise within the loan purchasing space, which is typically a $100M annual business for the bank.

“While the typical small bank might have trouble understanding how to mitigate loan risks that are prevalent in the bridge loan space, understanding these types of deals is at the very heart of Northeast’s knowledge base,” said Jonathan Levirne, who also serves as a senior vice president of business development at Northeast.

Garber gave the example of a real estate debt investor and operator in Hartford, Connecticut, who came to Northeast Bank with a complex financing request. It was planning on purchasing a nonperforming loan collateralized by a $10M real estate asset that was owned and occupied by a company that recently declared bankruptcy. As a result, the $8M loan on the property was significantly delinquent, and the property was in foreclosure. The bank did not want to deal with the foreclosure, so it was planning to sell the loan for $6M. The buyer of the loan came to Northeast Bank for financing. 

The bank offered a $3.65M loan at 8%, with a two-year deal plus extensions. Northeast also funded all of the company’s interest payments at closing. 

“In the end, the client was doing backflips,” Garber said. “Their investors were going to charge them high teens returns where we only charged them 8% and other lenders weren’t going to give them more than a one-year term. With us, they got three.” 

Garber said Northeast Bank’s ability to skillfully handle complicated deals like this one all comes back to its roots as a note-buyer. 

“We’re in a better position than most,” Levirne said. “We’re a real estate bank, we built a balance sheet by doing CRE loans and we have an executive management team that has been purchasing loans since the 1990s. They have built a team around that knowledge base which includes credit underwriters, real estate underwriters, asset managers, a legal team and more, all working in-house.”

He added that Northeast’s clients get the added benefit of working with an organization that has its own capital. Northeast Bank is a federally regulated bank and a public company, which provides clients an added layer of certainty that their deal will close. 

“The Hartford, Connecticut, example is the kind of deal we love to make,” he said. “We had the right client, buying a good asset with a sound business plan. Plus, thanks to our background, we fully understood the key details and intrinsic value of the asset. Everything was in the right place to let us do what we do best: help clients put out more capital, do more deals and improve their return.” 

This feature was produced in collaboration between the Bisnow Branded Content Studio and Northeast Bank. Bisnow news staff was not involved in the production of this content.