By Adam Vanlerberghe, Lever Capital Partners
A strong recent economy combined with loosened regulatory constraints have contributed to a healthy commercial real estate (“CRE”) lending environment.
In such an environment, banks often look to put out more capital and be a bit more aggressive with their underwriting. Back in 2017, large banks with more than $100 billion in assets experienced a 5% growth rate in commercial real estate lending, according to Fitch Ratings. In addition to increased activity, we saw banks offering loans as high as 75-80% loan-to-cost (“LTC”) on construction projects. Higher LTC ratios have certainly been welcomed by our commercial real estate developer/investor clients as it lowers their required equity contribution, thus allowing them to pursue additional investment opportunities and/or limit their need to bring on added partners.
However, that 5% growth rate reported by large banks in 2017 shrunk to 1.2% in 2018, according to Fitch. The reduced growth rate is likely to coincide with more conservative underwriting from these larger banks. As a result, underway construction projects may have difficulty when transitioning from their high LTC construction loan to their take-out/permanent loan facility in a more conservative lending environment. This can especially be the case when a recently completed project needs time to reach stabilization and/or didn’t realize enough value creation during the development period. When this occurs, the permanent loan proceeds being offered may not be enough to fully payoff the high LTC construction loan.
The team at Lever Capital Partners (“LCP”) helps our clients navigate such funding shortfalls and can often bring multiple solutions to the table such as a bridge loan, mezzanine loan, preferred equity or joint venture equity. We always consult with our clients and carefully consider their partnership structure and business strategy to help them determine the absolute best solution.
Fortunately, large banks that are pulling back on CRE lending are not the only options available, as the above funding solutions will likely be provided by a non-bank capital source. At LCP, we have a vast network, experience and long-standing relationships with private/public debt funds, REIT’s, private equity, credit unions and life insurance companies which we utilize to provide our clients with optimized funding options for their commercial real estate transactions.