Private Lending Thrives As Banks Step Back
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For Michael Burwell, Redwood Mortgage president, director and chief financial officer, times are really good at his private lending company in California — and good for private lending in general as institutional lenders continue to shy away from certain types of deals.
The private lending/bridge lending sector in California completed 9,104 loans in 2014, the latest reporting year, up from 8,789 loans in 2013, according to the California Bureau of Real Estate. Total loans were worth about $2.8B in 2014, up 18% compared to 2013. Prior to the Great Recession, private lending peaked at about $5.7B in 2015 when 18,193 loans were issued. The sector will increase nationally as more developers get into private lending to provide alternatives to bank financing.
At San Mateo-based Redwood Mortgage, the increased demand for private equity options is having a significant impact. Redwood Mortgage, which handles loans in the San Francisco Bay Area and Southern California coastal metros from Santa Barbara to San Diego, issued $100M in loans last year. The company anticipates a 50% increase to $150M worth of loans this year, and is well on its way to reaching that goal, Burwell said.
Demand for private lending increases during times when real estate equity is created and there are a lot of acquisitions, according to Burwell. Institutions are often hesitant to provide cash loans during this part of the cycle. Many building owners who want to acquire another property or renovate a property for repositioning in the market are unable to get the funding they need for that next transaction.
“We fill that void,” Burwell said. “When [the property] is stabilized, [institutions] come back in and provide a takeout loan on that transaction. We are very active in helping real estate do different acquisitions with shorter-term money.”
Redwood Mortgage can offer loans from $100K to $10M. Many commercial banks have loan minimums that often start at $500K to $750K, which is too high for some business owners and investors, Redwood Mortgage director of sales and marketing Steve Belleville said.
Burwell said demand for private lending has increased year-over-year for the last four years in California. Investors want to be in California because yields are attractive. Property values also rebound quickly after recessions. San Francisco and Southern California metropolitan areas had the smallest declines in the state during the recession and came back the fastest after the recession, according to Burwell.
“People want to get into real estate when property values seem to be going up, but institutions may not have enough comfort that the direction is that way,” Burwell said. “We benefit because local knowledge allows us to be more nimble and notice neighborhood trends and stability. We can jump in during that in-between time and help facilitate recoveries.”
Burwell said unlike banks that can take 30 days or more to review and issue a loan, Redwood can provide a loan within two weeks. He said that is because every part of the loan process from the agents on the ground to the loan committee and loan documents are vertically integrated and done in-house. The company also knows its region well and knows the market well enough to have an understanding of local real estate trends.
Also unlike an institution, Redwood Mortgage will forgive a credit problem even if it was as early as 18 months prior. The company does not require as much coverage of cash flow to debt payments.
“We’re going to be more forgiving on credit discrepancies than an institution, but we’re not blind to it,” Burwell said. “We want to know those things have been put to bed.”
Redwood will provide cash out for a purchase of an additional property or provide cash out to improve a property’s exterior or interior for repositioning. These small short-term renovations are not often of interest to institutions. Loans typically last 12 months to five years. Rates are all fixed and range in the mid-sixes to mid-10s and depend on the credit rating and loan-to-value.
Redwood Mortgage’s typical clients are the middle to small entrepreneurs, many of whom may do a transaction every few years or one to four or so each year, and the company’s services are not used for every transaction. The company will lend on residential with one to four units and multifamily with five to 40 units. It also will consider office buildings a notch down from Class-A, mixed-use and retail.
One of Redwood’s clients in San Francisco owned a small building and spent more than $1M rehabbing it and bringing it up to code. He turned the building into a three-unit tenant-in-common building. After he completed that project, he wanted to start his next project, but did not have the cash to purchase the building until the previous project was sold. He borrowed via Redwood, and Burwell said the loan will not last long since the lender will receive payment with the sale of the TIC units.
“There are a whole bunch of winners in that transaction: the seller of the property and the guy who bought it. We’ll be winners for making the loan and the people buying the units will get a nice place to live with first-class amenities,” Burwell said. “It is a clean, sound building up to code. Otherwise it was a 100-year-old building.”
More of these types of transactions are common in San Francisco since much of the building stock is old and not up to code. Burwell said it is the same story for office buildings and other properties in San Francisco. This renovation trend to get buildings to code is common throughout California, with Los Angeles 18 months behind San Francisco.
Another example of how private lending works is when a buyer bids on an eight-unit apartment complex in mid-Peninsula. Oftentimes loan contingencies can kill a deal, according to Burwell. This prospective buyer wanted his bid to stand out. He had good credit and Redwood pre-underwrote everything and gave the client assurance it would offer a loan that was as good as cash. He was able to make an all-cash offer without any contingencies and ended up getting the deal.