New Lending PlatformsThere is wide recognition that the demand for refinancing and for acquisition debt funding is very large and unmet. It is highly likely that there will not be a large scale securitized lending market again for at least 2-3 years, until a variety of regulatory and legal issues are resolved, and until the bond buyers are comfortable the underwriting is back to 1993-94 rules, and the rating agencies have materially amended how they analyze risk. All of this is going to take time. While there will be a few large securitized offerings that make news, there will be a long wait for the ordinary mid size to small property to get conduit funding again.To fill that demand there are various groups who are setting up, or have already set up lending platforms. I have spoken to several and am involved in working with a few. The issues are quite interesting. None are very large since funding for them is limited and warehouse lines are not yet readily available. The ones that have been or are formed rely on equity investors to provide the funds. Those investors are generally seeking a 15% yield-part current and part PIK. They generally are not interested in pure equity participations, but do want equity like returns through the PIK interest.The other issue is the investors want relatively lower risk than is required to obtain equity like returns. There in lies the rub. This has hampered some of the fund raising that is underway. It is why some of the proposed mortgage REITs have not been successful. It is also why some that have been raised are buying paper in the hope of higher returns.Buying existing paper, depending on vintage and originator, can be deeply flawed, and so may or may not turn out the returns intended if one is not careful what is being bought. Originating new paper for refi may also not drive the returns since a lot of better borrowers simply will not pay the price and will use extend and pretend for now. The main market is more likely the acquirer who will look at the PIK or participation as bridge equity. The issue there is the borrower will want short call protection so he can refi this loan as soon as there is a revitalized lending market at more normalized pricing- likely in 2-3 years.The groups now forming are likely to offer 80% -85% leverage on cost to acquire or current value, on the very reasonable bet that we have hit bottom and values will only rise from here ., making the leverage in 3 years more conservative and thereby refinancable. The issue is that the investors who provide the capital to the lending platform are risk averse and view 85% leverage as too risky even though is probably is not if well underwritten under today's numbers.Having created a lending platform myself in 1993, I have always believed that the exact right time to lend is at the very bottom of the cycle, like now, and to then stop lending 5-7 years into the upturn. That is when everyone else is lending and margins are squeezed, and underwriting and covenants start to get too easy. When securitization is back in a sizable way, it is time to get out. In the meantime, high leverage lending if underwritten right, and priced to fully reflect the equity component risk of the B piece can be safe and very lucrative.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM Digital Member, you’ll receive:

  • Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
  • Educational webcasts, white papers, and ebooks from industry thought leaders
  • Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.