High yields tempt banks and new players to ramp up bridge lending, writes Al Barbarino
The commercial real estate bridge lending market has grown exponentially in the past year as lenders new and old seek higher yields amid less lucrative alternatives.
Bridge loans, which typically stretch up to three years or until permanent financing is obtained, accounted for just 11% of total loan closings in Q1 2014, but that figure had doubled by Q3, based on a representative sample of deals arranged by CBRE.
With five and 10-year US treasuries yielding around 2% and 1.5% respectively and money market funds yielding almost nothing, bridge loans have gained appeal.
“A 5-10% yield on a bridge loan, on a risk-adjusted basis, is pretty darn good,” says Brian Stoffers, head of CBRE Capital Markets. “A lot of borrowers are looking for intermediate solutions to rehabilitate a project then sell it for a profit.”
Before the financial crisis, big banks such as Wachovia, Lehman Brothers, Bear Stearns and Merrill Lynch provided tens-of-billions of dollars worth of bridge lending per year, but following the crisis they either vanished or were inundated with regulations, such as Dodd-Frank and Basel III. Existing lenders and new players have filled the gaps as real estate markets improve.
“We’ve seen the market grow up, consolidate and institutionalise,” says Kevin Miller, CEO of Thorofare Capital, which launched a $400m bridge lending debt fund in September. “It’s gone from a murky backwater to being more in the forefront.”
Goldman Sachs and Morgan Stanley have stepped up their bridge lending, while new market entrants include private equity firms, new funds, former CMBS shops and mortgage REITs. Cantor Fitzgerald is said to be raising about $400m to issue bridge loans.
Starwood Property Trust, Blackstone and Mesa West have become more aggressive, but the $5bn-6bn of balance-sheet bridge lending Blackstone and Starwood completed last year, or Mesa West’s $2.1bn, is far below the colossal pre-crisis output. “Comparatively, we are small potatoes,” says Mesa West co-founder Jeffrey Friedman. “What keeps me up at night is whether the banks will come back to being aggressive as they were.”
Private equity firms and investment managers are among the most active borrowers looking to reposition assets then cash out. “The institutional investor with a shorter business plan is the primary customer now,” says Friedman. “These [internal rate of return] driven guys are looking to buy something, lease it or fix it up, then sell it.”
While bridge loans are higher yielding and considered riskier than senior and even some mezzanine debt, lenders typically have faith in their borrowers. For example, Mesa West provided a $71.6m, 3.5-year, interest-only, floating-rate bridge loan on a 330,438 sq ft office portfolio in Boca Raton, Florida, as Friedman says it was confident that the sponsor would turn the assets around.
Hard and fast rules for a speedy resolution
Certain bridge financing, defined as “private money” or “hard money” loans, typically have a shorter turnaround time, smaller dollar size, and are sometimes made on riskier assets.
“Our borrowers don’t necessarily have the greatest credit scores,” says Brian Good, founder of Los Angeles-based private money specialist Eagle Group Finance. “We focus more on real estate than the tax documents.”
Eagle provides loans up to $25m, with up to three-year terms and 70% levels, at 8-12% rates. Whereas conventional banks might need 60 days to close (and charge half that), Good typically closes in two weeks.
“Hard money loans” have something of a bad reputation in the industry, but Good and others differentiate themselves from so-called “loan-to-own” lenders, who bank on the possibility of default, lending at LTV levels as high as 90% and charging north of 12%.