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As Recovery Continues, Borrowers Need Customized Financing. Lenders Need To Keep Up

Canary Wharf London

While it may seem like 2020 was a stagnant year for commercial real estate, a current of new financing deals was flowing just under the surface. Those deals had one thing in common: customization.

As many traditional capital sources pared back their CRE lending arms — and as the economy became more unpredictable — borrowers needed more complex, tailored financing packages. Deals that combined capital markets and agency funding with balance sheet loans, lines of credit, depository accounts and other banking services became more common. For the lenders who are able to coordinate these complex transactions quickly, the pandemic recovery has been a very busy time.

John Manginelli, president of KeyBank Real Estate Capital for the Northeast, said that his team spent 2020 helping dozens of new borrowers who had been struggling to find what they needed in other parts of the lending world. In years past, borrowers might have been able to get all the financing they needed from an agency, a bank or a debt fund, but the most competitive financing packages were the ones that combined the best of all those sources. The need for customization has continued into 2021.

“What we’re finding many borrowers are looking for is integration across our balance sheet, the wider capital markets and banking services,” Manginelli said. “We found that by combining all these aspects of what we do, we could provide more affordable financing for projects with unique business plans.”

Unique and nontraditional business became all the more common in 2021, Manginelli said, as sponsors saw opportunities to make acquisitions, refinance and grow their portfolios. With the pandemic limiting cash flow and throwing the future into question, establishing lines of credit was more important than ever. 

Manginelli cited a portfolio of three multifamily properties across the Southeast, for which his team is in the process of closing a $110M financing package, made up of three separate loans. The buildings have been leased to around 70% occupancy, and the borrower was in a competitive bid process and needed to close within 30 days. 

The KeyBank team was able to provide a deal on its own balance sheet, which it plans to transition to a long-term fixed-rate loan through an agency within 12 months, once leasing is complete at the three properties. Once that transition occurs, Manginelli said, KeyBank will also fund an entity-level unsecured loan to finance so-called “Covid reserves” — interest reserves that Fannie Mae and Freddie Mac have required during the pandemic to protect lenders and borrowers alike.

“As the pandemic wanes, the Covid reserve requirements will likely decrease or be eliminated,” Manginelli said. “Funding those reserves is an additional product service to assist borrowers to get the financing they need in this unpredictable time.”

The client is providing KeyBank with $25M in deposits as it executes its business plan — being able to work between the capital and depository sides of the business was crucial for both parties, Manginelli said. 

In many cases, KeyBank’s Income Property Group and its Commercial Mortgage Group issued loans simultaneously in order to execute a business plan. Manginelli described how one borrower was looking to finance a portfolio of four self-storage facilities across two Northeast cities in September. 

The borrower was under contract for the properties and negotiating in a competitive bid process, and it needed to move quickly. KeyBank provided 90-day bridge funding with a CMBS loan for two of the properties, which were already leased up. For the remaining two properties, which had just completed construction, KeyBank turned to its own balance sheet and provided three-year floating-rate debt, with options to extend further. The total financing amounted to $16M, and in all likelihood, Manginelli said, the two balance sheet properties will move to permanent CMBS financing before the term is out. 

“This was a classic execution for KeyBank,” Manginelli said. “A new client, combining capital markets, our balance sheet and the certainty of execution to close quickly.”

Even as the economy revs up, these sorts of complex deals are not slowing down. Manginelli said he expects the economic dislocation of the pandemic will power demand for this sort of custom financing for at least the next 18 months. He pointed to one proposal that had just arrived in early April for a client that requested over $80M in debt for three multifamily properties that they built and own. The client wanted the ability to draw $10M more in debt, but also the flexibility to prepay the debt if they wanted. 

KeyBank ended up proposing three nonrecourse financing solutions: $45M in 10-to-15-year agency debt, $36.5M in debt from KeyBank’s balance sheet with the ability to prepay and an $8.5M line of credit for three years on the smallest deal.

Borrowers’ need for customization has created a reshuffle in the world of lending, Manginelli said, with deal sponsors who have always worked with one bank beginning to branch out. And with the recent mergers and acquisitions of lenders large and small, the landscape is wide open for lenders and borrowers to forge new relationships.

“During these periods of disruption, it’s very common to see migration from one lender to another,” Manginelli said. “Our hope is to provide the optimal choice for every client, no matter whether they’ve been banking with Key for 10 years or 10 days.”

This article was produced in collaboration between KeyBank and Studio B. Bisnow news staff was not involved in the production of this content.

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