Tag Archives: LeverCapitalPartners

How Will Multifamily Operating Expenses Affect NOI in 2025?

by: Dalton Morgan

Multifamily properties have long been considered one of the more resilient real estate asset classes. However, rising operating expenses are posing challenges to profitability. Factors such as high inflation, wage growth, and increased material costs due to supply chain disruptions are driving up these expenses. As operating costs rise, net operating income (NOI) is directly impacted, diminishing investment returns. Read on to see what we think the impact will be next year.

Rising Operating Costs

Operating costs have historically risen over time, but since 2021, the growth has accelerated. According to Moody (2024), expenses like payroll, utilities, repairs, and insurance are increasing at two to three times the rate of the preceding decade. For example, payroll and benefits have risen by $75 to $120 per unit annually, utilities by $55 to $95, and repairs and maintenance by $35 to $95 per unit depending on the market quartile (Globe St., 2024). 

Key Drivers of Cost Increases

Inflation: Rising prices for goods and services are significantly impacting multifamily properties. Utilities, which account for 15%-20% of overall operating expenses, have risen by an average of 10.7% across the top 50 U.S. markets, increasing total operating costs by up to 2% (Matthews).

Construction Materials and Labor: Prices for materials like timber, steel, concrete, and copper have surged due to high demand, supply chain issues, and inflation. Labor shortages are exacerbating the issue. As of May 2023, there were 396,000 job openings in construction (NAIOP). To attract skilled workers, companies are raising wages, which in turn increases development costs, further impacting NOI.

Insurance Costs: Insurance premiums for multifamily properties have risen 33% year-over-year, amounting to an additional $180 per unit (Matthews). This increase is driven by the heightened risk of natural disasters such as hurricanes, floods, droughts, and wildfires, which collectively cost the U.S. between $179.8 billion and $496 billion annually (Center for Disaster Philanthropy).

Impact on NOI and Rental Market Dynamics

Net operating income growth has slowed significantly, achieving only 2.8% in Q1 2024 compared to 24.8% in late 2021 (Globe St.). Owners may attempt to offset rising expenses by increasing rental rates, but market competition and tenant affordability concerns limit rent growth. The oversupply of multifamily housing is another factor. In June 2024, private-owned housing completions rose by 10.4% to a seasonally adjusted annual rate of 1.71 million units, with 656,000 being multifamily units (Globe St.).

With supply outpacing demand and mortgage rates keeping homeownership costly, property owners face limited room to raise rents. Moody’s forecasts asking rent growth in the low- to mid-1% range for 2024, while the gap between asking and effective rents exceeds $90 per unit. For a 100-unit property, this translates to $9,000 in unrealized rental income, while expenses remain elevated.

These factors also put pressure on debt service coverage ratios (DSCR), which generally need to be in the range of 1.20x to 1.25x. Rising expenses reduce the cash flow available for debt payments, heightening the challenges of refinancing and the risk of default, particularly in an unpredictable economic environment. At Lever Capital Partners, we understand the obstacles many investors encounter when acquiring or refinancing multifamily properties. Contact us today for a prompt analysis of your unique situation, so we can provide a customized solution that aligns with your investment strategy.

Future Outlook

Some factors may provide relief for multifamily property owners in 2025:

  • Onshoring and Supply Chain Adjustments: The push for onshoring could stabilize material costs over time. Infrastructure enhancements may balance supply and demand, potentially reducing construction expenses.
  • Interest Rates: Mortgage rates are expected to remain in the low 6% to high 5% range throughout 2025, a notable improvement from the 7% national average in 2023 (US News). Additionally, loan rates from Fannie Mae, Freddie Mac, CMBS, and other sources could drop by 1%-2% due to Federal Reserve rate cuts, easing borrowing costs.
  • Inflation Trends: Inflation is projected to slow to 2.4% by late 2025 (Goldman Sachs). However, potential tariff policies could push inflation closer to 3%.

While the outlook suggests possible improvements, the timeline and effectiveness of these changes remain uncertain. Multifamily investors must navigate ongoing challenges and adapt strategies to preserve NOI amid fluctuating operating costs and market conditions.

Secrets to Client Success: Leveraging Expertise and Strategic Partnerships

by: Adam Horowitz

In our years of experience, we’ve observed key factors that distinguish successful deals from unsuccessful ones. By studying what works, we’ve identified some core strengths of our clients that consistently lead to successful outcomes. Let’s explore three key strategies that have contributed to these successes. We’ll look at how one of our retail clients creates value before a deal even closes, how an industrial client leverages deep local knowledge, and how a multifamily client rigorously examines underwriting.

1. Creating Equity Before Closing

Over recent decades, many sponsors have turned away from retail investments, favoring multifamily and industrial sectors. However, the shift away from retail has presented valuable opportunities for those who remain. One of our retail clients has excelled in finding value-add assets in this sector by identifying spaces where they can secure tenants that the previous owner couldn’t. They’re highly selective, reviewing a large number of deals but quickly zeroing in on properties where their unique strengths will allow them to secure signed tenant contracts before closing. This ability to reduce vacancy and increase asset value even before a transaction is finalized is a powerful way to build equity upfront.

2. Knowing the Market—Down to the Street Level

When evaluating a property, having an in-depth understanding of the market can make all the difference. Often, lenders or LP investors will scrutinize location details, down to the side of the street. A client of ours in the industrial sector has a level of market knowledge that turns this type of analysis on its head—rather than hearing why investors have concerns, he explains to them why his choice of location is optimal. Knowing a market this intimately builds credibility with lenders and investors, who are more inclined to back a developer with this level of insight.

3. Trusting the Numbers—Rigorous Underwriting in Multifamily

Every proforma looks good on paper, especially when an exit cap is set low. But are the numbers realistic? Are they thoroughly tested, or simply optimistic estimates? One of our multifamily clients takes an exceptionally rigorous approach to underwriting, testing various scenarios across economic shifts, index changes, and local market dynamics. This client refuses to close on a deal unless it meets stringent criteria. By modeling both the upside and downside possibilities, they go into each project with a high degree of confidence in their decisions. This approach doesn’t just minimize risk—it allows them to make informed decisions they can stand by.

Leveraging Expertise and Strategic Partnerships

While each of these clients brings specific expertise to the table, they don’t attempt to handle every aspect of the process themselves. Instead, they focus on what they know best and outsource other critical components, like financing, to experts like us at Lever. By doing so, they streamline their efforts and ensure each element of a transaction is handled by a specialist. When these clients come to Lever, they trust us to manage the financing so they can focus on other priorities, secure in the knowledge that their deals are in capable hands.

This delegation enables them to hit their projected numbers consistently and sometimes exceed them. They rely on their strengths, whether that’s in creating pre-close equity, mastering their market, or rigorous underwriting, and turn to us to handle the financial aspects seamlessly. They know that the right financing partner can make the difference in a competitive market, allowing them to achieve their goals more efficiently.

Why a Client Relationship Matters

The distinction between having a client versus a customer is significant. Our clients bring all their financing needs to us because we know their business inside out, which enables us to represent them effectively. We’re prepared to answer lender questions without needing to consult our clients constantly. This deep understanding allows them to capitalize on the cost of our services within each deal, letting them concentrate on what they do best without distractions.

Our Client Exclusive Program exemplifies this approach. By working exclusively with Lever, our clients benefit from a dedicated, knowledgeable partner who handles the financing end with as much diligence and care as they apply to their own areas of expertise. Our collaboration allows them to pursue their vision confidently, knowing they have a financial partner invested in their success.

If you’re interested in exploring how our Client Exclusive Program could benefit your business, please reach out to us via email at [email protected]. We’d be happy to discuss how we can help you focus on your strengths while we handle the financing to bring your deals to a successful close.

From Overbuilt to Optimized: The New U.S. Retail Landscape

by: Simone Mehdizadeh

Retail vacancy rates hit a 20-year low of 5.4% this summer, down almost 50% from the pandemic peak. Even before COVID-19, vacancy rates were already very high at 9.7% in January 2020. Three key factors are contributing to this historic drop in vacancy; store closings, better tenants, and conversions to mixed-use.

The recent surge in store closures that has ultimately surpassed openings is creating a window of opportunity for opportunistic retail investors across the country. A Coresight Research report highlights that 4,548 stores have closed compared to 4,426 openings, resulting in a net loss of 122 stores (CoStar). This shift has been driven by significant closures from retailers like Big Lots (not to mention many others) which plans to shut 258 locations nationwide. Despite this, according to CoStar, analysts remain bullish that the demand for retail space continues to outstrip supply, indicating a tight market and a substantial demand from various sectors for retail space. This imbalance between the need for retail space and its availability, combined with significant bankruptcy activity closing stores across the country, leaves a window of opportunity for investors to buy retail centers at a discount (due to recent vacancies) and take advantage of the many retailers looking to expand and willing to pay higher/market rents.


Developers are revitalizing shopping centers by introducing more experiential tenants such as entertainment venues, modern restaurants, and recreational activities that attract a broader customer base. This shift started in the mid-2010s when traditional retailers like bookstores were replaced by more trend-driven brands and entertainment options. Experiences like pickleball courts and escape rooms are now major draws. For instance, the State of the Escape Room Industry Report shows that 68% of owners plan to expand, indicating how these new activities boost foot traffic and help retail centers thrive. In today’s retail landscape, centers that incorporate experiential elements and are anchored by major grocery chains like Walmart, Target, or other essential retailers are experiencing significant revenue growth among nearly all tenants, while those lacking such features continue to face challenges.


Many middle-market retail centers that have been hit hard are being redeveloped into mixed-use spaces, combining retail with residential, office, and recreational elements. This transformation creates vibrant community hubs, boosting retail while meeting demand for housing and office space.  It also draws people into retail center locations as a destination and keeps them there as long as possible to maximize the return on investment. For example, Trademark Property Company is reducing retail space by 50% in one of their developments, and adding office, hospitality, and residential components to revitalize the area. Similarly, Paradise Valley Mall in Phoenix now includes residential amenities like a fitness studio and dog park, turning it into a desirable mixed-use destination.


Retail centers are becoming more attractive investments, particularly when compared to apartment and industrial properties with lower cap rates and less value-add opportunities. Our retail clients are finding good investment acquisitions all over the country where they can take advantage of the higher cap rates and add value quickly by utilizing the strategies above. Lever Capital Partners can help secure tailored financing solutions to help investors navigate retail real estate opportunities, secure profitable deals, and maximize returns. Whether you’re looking to finance a retail project or explore new investments, Lever’s expertise ensures you get the best guidance for success.

AI-Powered PropTech: The Future of CRE Efficiency and Innovation

by: Caden Jang

Amid an ever-evolving commercial real estate (CRE) industry, the emergence of property technology (PropTech) has sparked a significant transformation. We talked about PropTech last month and highlighted companies that are on the rise. PropTech encompasses a wide range of digital solutions designed to streamline every aspect of real estate; from development and management to marketing and tenant engagement. In 2021, the global PropTech market was valued at over $25 billion, with a projected compound annual growth rate (CAGR) of 15.8% annually through 2030. This surge is largely fueled by the growing use of Artificial Intelligence (AI), which promises to revolutionize the industry by enhancing energy efficiency, elevating tenant experiences, promoting sustainability, and providing advanced analytics for data-driven decision-making. As AI-driven PropTech continues to gain traction, these innovations are sure to reshape the future of CRE, bringing both economic and operational benefits. 

Energy Saving

One of the significant advancements of AI-driven PropTech is its application in Energy Management Systems (EMS) and Building Management Systems (BMS). These systems bring together critical building components such as HVAC, lighting, and security under a single, centralized platform. By utilizing data from Internet of Things (IoT) sensors and smart meters, EMS and BMS can pinpoint inefficiencies and suggest corrective measures, ensuring properties run harmoniously to reduce energy consumption and improve building performance. A study by the American Council for an Energy-Efficient Economy found that implementing smart lighting, window shading and HVAC systems can lead to energy savings of 30-50%​. This translates to lower utility bills and a smaller environmental footprint, making these properties more attractive to eco-conscious tenants and investors, alike.

Tenant Experience 

Keeping tenants happy is key to maintaining high occupancy rates, and AI-powered smart building technologies are transforming how tenants interact with their spaces. From personalized climate control and lighting settings to easy app-based amenity bookings, tenants now enjoy a level of convenience that was hard to imagine just a few years ago. The integration of IoT devices allow for real-time adjustments to these features, providing a tailored living or working environment that boosts tenant satisfaction. Properties utilizing these technologies have reported up to a 30% increase in tenant satisfaction thanks to the personalized comfort and seamless digital experiences they offer.

Beyond day-to-day comforts, AI also provides property managers with invaluable insights into tenant behavior and preferences. By analyzing this data, managers can anticipate issues before they arise, address concerns quickly, and proactively improve tenant services. This approach not only strengthens relationships with existing tenants but also offers greater attraction to prospective ones, helping reduce vacancy rates and increase long-term revenue​​. 

Sustainability

With sustainability now a main concern for many CRE stakeholders, AI-driven PropTech solutions, particularly ClimateTech, are playing a crucial role in addressing these demands. According to the 2023 JPMorgan Business Leaders Outlook for CRE, improving energy efficiency is a top priority for building management. AI-powered EMS are making that goal easier to achieve by using real-time data from IoT sensors, weather forecasts, and historical energy usage patterns to fine-tune energy consumption. For example, by adjusting HVAC and lighting systems based on building occupancy or natural light availability, energy use can be reduced by 10-25% in HVAC alone. 

Integrating AI-driven sustainability solutions can not only help companies meet their Environmental, Social, and Governance (ESG) goals but also reduce operational costs and improve tenant retention by creating healthier, greener environments.

Advanced Analytics for Informed Decision Making

One of the most transformative aspects of AI in PropTech is its capacity to deliver advanced data analytics. AI algorithms can process vast amounts of data from various sources, including market trends, tenant preferences, and property performance metrics. This data-driven approach enables property managers and developers to make more informed decisions.

For instance, AI can identify optimal pricing strategies based on current and historical market data, forecast demand for different types of spaces, and highlight promising investment opportunities. These insights enable CRE professionals to react quickly to market shifts, adjust leasing rates as needed, and position properties to maximize appeal and profitability. By relying on data rather than intuition, AI-driven analytics significantly improve decision-making and ROI across the board. 

How Lever Can Help

As AI-driven PropTech continues to reshape the commercial real estate landscape, Lever Capital Partners is uniquely positioned to help clients leverage these innovations as they are investors at many PropTech firms and follow the most recent trends. At Lever, we pride ourselves on our ability to finance a wide array of PropTech-driven projects, from energy-efficient upgrades to smart building systems. Our expertise in evaluating and structuring capital ensures clients have access to the most accretive financing options tailored to their strategic goals.

References:

https://www.grandviewresearch.com/industry-analysis/proptech-market-report https://www.aceee.org/sites/default/files/publications/researchreports/a1701.pdf https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/real-estate/deloitte-nl-fsi-real-estate-smart-buildings-how-iot-technology-aims-to-add-value-for-real-estate-companies.pdf https://www.jpmorgan.com/insights/outlook/business-leaders-outlook/commercial-real-estate-business-leaders-outlook https://brainboxai.com/en/solutions/ai-hvac-optimization ” CoStar https://www.grandviewresearch.com/industry-analysis/proptech-market-report https://www.aceee.org/sites/default/files/publications/researchreports/a1701.pdf https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/real-estate/deloitte-nl-fsi-real-estate-smart-buildings-how-iot-technology-aims-to-add-value-for-real-estate-companies.pdf https://www.jpmorgan.com/insights/outlook/business-leaders-outlook/commercial-real-estate-business-leaders-outlook https://brainboxai.com/en/solutions/ai-hvac-optimization

PropTech Companies on the Rise

by: Adam Horowitz

Welcome to the exciting world of PropTech, where real estate meets cutting-edge technology. Two years ago I became a Venture Partner with RE Angels, an Angel Fund dedicated to investing in technology-driven real estate solutions. We’ve carefully selected and invested in nine companies so far, including Daisy, Covercy, Paraspot, Blanket, Waltz, block.a, Tough Leaf, Tweaks, and Pest Share, which we’ll explore in this overview. 

Mastering Retail Bankruptcies: Key Strategies for CRE Success

by: Samantha Armendariz

The commercial real estate (CRE) landscape has been significantly impacted by the upsurge in retail bankruptcies seen in the Spring of 2024. The fallout following the decline of once-stable retail giants such as 99 Cents Only Stores and Red Lobster is extensive. The closure of thousands of retail locations has not only resulted in decreased property values and rental income but has also triggered high vacancy rates that threaten to diminish foot traffic and affect neighboring tenants. Investors in retail centers anchored by these former tenants are left to grapple with stabilizing their properties and mitigating financial losses. 

The financial implications of these bankruptcies are stark. Properties with substantial vacancies often face revaluation downward, impacting investors’ balance sheets and reducing their borrowing capacity. This is likely driven by the loss of revenue, which lowers the net operating income (NOI) and the property’s value based on income capitalization. A higher vacancy rate within a retail center may also lead potential investors or lenders to believe the center is undesirable or is located in a declining market. Devaluation can lead to higher interest rates or stricter loan terms when seeking acquisition financing or refinancing, further complicating financial stability in the sector.

Amidst these challenges, the industry has witnessed a notable shift towards repurposing vacant retail spaces. Repositioning vacant commercial buildings has not only breathed new life into dormant properties but also aligns with evolving consumer preferences and community needs. Creative strategies have emerged to reposition vacant retail spaces effectively. From transforming these areas into vibrant lifestyle entertainment hubs (ie. adding fitness centers and experience-based retail) to integrating residential or office spaces within mixed-use developments, these adaptations cater to diverse demographics and inject vitality into local economies. Reusing old building shells significantly reduces carbon emissions. Repurposing existing foundations, structures, and enclosures helps to avoid the emissions tied to producing, transporting, and installing new materials like concrete or steel. This process capitalizes on the carbon already embodied in the existing buildings. This trend of repurposing assets has also proven beneficial to developers as these projects are 16% less expensive than ground-up construction and accelerate the construction timeline by 18%. Such initiatives not only optimize existing infrastructure but also align investments with long-term sustainability.

There are several underlying issues that may lead to retail bankruptcies. Often, private equity acquisitions burden companies with high debt loads, leading to financial strain and prioritization of short-term gains over strategic long-term planning. The CRE industry has witnessed cases of retailers filing for bankruptcy, such as with Toys “R” Us and Payless ShoeSource, following a merger or acquisition. When managing the portfolios of these retail companies, some private equity firms may sell off valuable assets of the acquired company to repay debt or generate quick profits, leaving the company weaker and less competitive. As most recently seen with mass sale-leasebacks for both 99 Cent Only Stores and Red Lobster, the lack of industry-specific expertise within acquiring firms can exacerbate these challenges, resulting in misaligned priorities and ineffective management practices. 

The shift in consumer behavior has also played a pivotal role in the downturn of retail fortunes. The exponential growth of e-commerce, accelerated by the COVID-19 pandemic, has reshaped spending habits. E-commerce sales in the U.S. currently makeup over 22% of retail sales and recently increased over 7% from $1.040 trillion in 2022 to $1.119 trillion in 2023. This trend has significantly impacted brick-and-mortar stores, particularly in sectors such as apparel and electronics, where online retailers dominate market share. In response to these dynamics, retail giants like Target and Walmart have pivoted towards hybrid models, blending online convenience with enhanced in-store experiences. Such adaptations reflect a strategic recalibration to meet evolving consumer expectations and sustain competitive relevance. 

When navigating this complex landscape, CRE professionals can leverage specialized expertise and strategic insights to mitigate risks and capitalize on emerging opportunities. Finance brokers such as Lever Capital Partners offer crucial support through financial restructuring, portfolio diversification advice beyond retail, and market intelligence for repurposing retail spaces. Lever Capital Partners is a premier player in the space with an extensive network, structured finance experience, and a commitment to personalized service nationwide. We offer access to both debt & equity capital, as well as advisory services for loan renegotiations, ensuring investors can maintain control in changing economic conditions. This makes Lever Capital Partners an invaluable resource for investors managing CRE finance amidst tenant retail bankruptcies.

As the retail sector continues to evolve, proactive adaptation and strategic foresight will prove pivotal for CRE investors and developers. By embracing innovation and leveraging comprehensive insights, stakeholders can not only weather the storm of retail bankruptcies but also foster resilient, adaptive real estate ecosystems poised for sustained growth. Although challenges are presented, opportunities for reinvention and success in retail development emerge. 

References:

US Ecommerce Sales Reached $1.119 Trillion in 2023 Adaptive Reuse: The ‘wrong’ Project in the Right Market.” ACRES Capital, 19 Oct. 2021 Commercial Real Estate Trends 2023: Reuse and Redevelopment.” CRE Knowledge Base, 29 Aug. 2023 Goldberg, Jason. “E-Commerce Sales Grew 50% to $870 Billion during the Pandemic.” Forbes, Forbes Magazine, 12 Oct. 2022 Here’s a Look at 99 Cents Only’s Retail Locations.” CoStar Rental Vacancy Rate [2024 ]: National Trends & Rates by City.” iPropertyManagement.Com, 5 May 2024 Meyersohn, Nathaniel. “Red Lobster Files for Bankruptcy | CNN Business.” CNN, Cable News Network, 20 May 2024 Williams-Eynon, August. “The New, Old Real Estate: Capturing Value, Sustainability, and Community Impact by Repositioning Older Buildings.” Urban Land, Urban Land, 10 Aug. 2020

The Keys to Unlocking CRE Loan Opportunities in the 2nd half of 2024 and beyond

by: Ashton Zakariaie

The commercial real estate (CRE) lending landscape is undergoing significant shifts, influenced by rising economic uncertainties and heightened caution among lenders. As we move into the second half of 2024, obtaining a CRE loan will remain a challenge, and only the most qualified sponsors will be able to secure financing.

The difficulty in securing CRE loans will persist through the end of 2024 and into 2025 due to increased lender caution and economic uncertainty. The stringent requirements set by lenders will significantly impact the acquisition, development, and refinancing of CRE projects, as fewer will meet the qualifications for funding. Developers will find it harder to start new projects, expand existing ones, or refinance current loans. However, there are strategic ways to navigate these economic constraints and meet the new, stricter requirements being implemented by lenders across the board.

New Requirements for CRE Loans

  1. Stronger Guarantors: Lenders now prefer sponsors who can provide robust guarantees. This additional security assures lenders of the repayment capabilities, thus reducing their risk.
  2. Experienced Sponsors: Sponsors with a proven track record and substantial experience in managing CRE projects are favored. Their experience suggests they are less likely to encounter insurmountable problems and are better equipped to handle and resolve issues if they arise.
  3. Better Financial Economics: The financial requirements for CRE loans have become more stringent. Higher debt service coverage ratios (DSCR) and lower loan-to-value (LTV) ratios are now the norm. This means sponsors must demonstrate stronger cash flow capabilities and provide more equity upfront, further ensuring lenders of the project’s viability and that interests are aligned. 

Impacts on Owners and Developers

The tightening of lending criteria has several critical implications for owners and developers:

  1. Stronger Sponsors for Construction Loans: Only the most financially robust and experienced sponsors will secure construction loans. This limits the pool of potential developers and may slow the pace of new construction projects and therefore the delivery of new product for the next few years.
  2. Reduced Construction and Acquisition Loans: Compared to previous years, the volume of construction and acquisition loans will likely remain low. This is a direct consequence of the stricter lending standards and the economic environment that is stymieing overall transaction volume.
  3. Challenges in Refinancing: As property values drop and loan terms become more stringent, refinancing existing loans will remain increasingly difficult. Falling property values reduce the equity available for refinance, and the stricter loan terms make it harder to qualify for new loans. Sponsors may find themselves unable to refinance with favorable terms, which could lead to financial strain and potentially forced sales.

Strategies to Secure Loans in 2024-2025

Given the challenging lending environment, sponsors can adopt several strategies to improve their chances of securing a CRE loan:

  1. Credit Enhancement: Enhancing the credit profile of the guarantor can make a significant difference. This might involve improving financial statements or finding additional guarantors to bolster the overall financial backing of the loan.
  2. Raising Additional Equity: With lower LTV/LTC ratios, sponsors will need to raise more equity to fill the financing gap. This additional equity reduces the lender’s risk and makes the project more attractive for financing.
  3. Higher Leverage, Higher Cost Debt: In some cases, taking on higher leverage, higher cost debt may be necessary to bridge financing gaps. While this increases the cost of capital, it can make it possible to move forward with projects that might otherwise be stalled due to equity shortfalls.
  4. Leveraging Relationships: A large network and strong relationships with lenders can help sponsors find more favorable loan terms. Sponsors should leverage their connections and work closely with financial advisors to identify the best financing options that are tailored to their project and overall business plan.
  5. Strategic Credit Enhancements: Finding credit enhancements that address both capital needs and credibility can be a game-changer. This might involve securing mezzanine financing, preferred equity, or other forms of credit support that can improve the overall financing package.

The CRE lending landscape in the second half of 2024 is characterized by heightened caution and stringent requirements. Only the most qualified and experienced sponsors with robust financial backing will succeed in securing loans. By understanding the new requirements and strategically enhancing their financial positions, sponsors can navigate this challenging environment and continue to pursue CRE opportunities. Lever Capital Partners’s knowledge and experience in times like these, matched with a well-connected network of capital providers with significant dry powder will be an invaluable asset for sponsors looking to secure the most favorable loan terms in this new era of CRE financing.

Is Rescue Capital Rescuing the Borrower or the Lender?

by: Eleni Zarokian

Rescue capital is a type of financing injected into distressed properties to support their business plans and prevent foreclosure or bankruptcy when traditional funding isn’t available. The primary goal of rescue capital is to stabilize the asset, allowing for refinancing or sale in the future. Given the complexity and risks associated with such funding, it is essential for borrowers to carefully evaluate their options, often with the guidance of experts like Lever Capital Partners, to ensure that the decision aligns with their long-term business objectives and does not result in further financial strain. Lever Capital Partners can help evaluate the current market options to ensure informed decisions and avoid further financial pitfalls.

Rescue capital can take various forms: first mortgage debt, mezzanine financing, preferred equity, or joint venture equity. Deciding to use it is often challenging, especially if you’ve signed recourse on the existing loan and feel cornered into borrowing expensive capital as your only escape from recourse. In such cases, it might seem like the only viable option to salvage your investment.

However, if you have a non-recourse loan, you might consider handing back the keys rather than taking on the risk of expensive borrowing. The goal is always to use the capital to stabilize the asset, and then refinance or sell it. At Lever Capital Partners, we help borrowers determine what options are available and strive to find those that align best with their business plans.

What Type of Rescue Capital Makes the Most Sense in Today’s Economic Environment?

  • Debt: Suppose you’re about to finalize an acquisition with bank financing, but just weeks before the closing, the lender’s credit committee rejects your deal because it doesn’t meet the new, stringent guarantor criteria. In this situation, rescue capital in the form of debt could bridge the gap, allowing you to close the deal. 
  • Mezzanine/Preferred Equity: Imagine you’ve completed your development, but leasing is progressing slower than anticipated, and your construction financing has depleted all the reserves. In such cases, secondary financing like mezzanine or preferred equity can provide the time necessary to stabilize the asset until you can refinance it.
  • Equity: Consider a scenario where your existing loan is maturing, and refinancing isn’t an option due to high-interest rates. Your current lender may agree to extend the loan but requires a cash infusion to reduce the loan balance. Here, rescue equity can facilitate the loan extension, ensuring continued ownership and operation of the property.

When Not to Use Rescue Capital

Rescue capital isn’t a one-size-fits-all solution. It’s crucial to recognize scenarios where it might not be suitable:

  • If your plan will take years to execute, the cost of borrowing could outweigh the benefits over a prolonged period.
  • If rescue capital will significantly dilute your equity, it might jeopardize your investment’s long-term viability.
  • If it will consume all cash flow, making it difficult to manage ongoing expenses and operational needs, it’s likely not a feasible solution.

Who Are the Capital Providers and How Can LCP Access Them?

Understanding who provides rescue capital and how to access it is essential. At Lever Capital Partners, we analyze all available options to determine the most viable sources of rescue capital. Our extensive network and industry expertise enable us to connect you with suitable capital providers, helping to mitigate risks such as making capital calls to equity investors or losing your property altogether.

We carefully evaluate whether the available rescue capital is a good fit for your project, ensuring that you make informed decisions in today’s unpredictable market. Our knowledgeable team is dedicated to finding the best solution for your situation, providing you with the stability needed to navigate economic uncertainties.

While rescue capital can be a lifeline for distressed properties, it’s essential to thoroughly evaluate its implications. Lever Capital Partners can guide you through this complex process, ensuring that you make decisions that align with your long-term business objectives.

Heartbreak Hotel or Hotel California? An Investment Opportunity or Unnecessary Challenge in the Hotel Industry’s Revival in 2024

by: Elton Luk

As the hotel sector’s performance returns to pre-pandemic levels, fueled by eased travel restrictions and a surge in consumer demand for travel, activity within the hotel industry is poised for significant growth and opportunity. This revitalization of the hospitality industry combined with potential rate cuts and a maturity wall in 2024 will make it challenging for current owners to refinance existing loans without injecting more capital, opening doors for new investors. Opportunities for new buyers exist, however it’s not all rainbows and unicorns for existing hotel owners due to the current interest rate environment and the distress that the state of the capital markets poses.

The current landscape presents a unique scenario of buying opportunities for investors, primarily driven by a tough financing market that limits competition. Many current hotel owners who are locked in at affordable rates may look to offload their assets when their current loans reach maturity. While investors face significant headwinds in securing favorable financing terms, Revenue Per Available Room (RevPAR) is forecasted to grow 3.0% in 2024 according to a recent CBRE report. If interest rates continue to decrease as many expect to happen this year, hospitality investments should prove much more attractive. Another significant factor to take into consideration is the dislocation we are seeing between supply and demand. Yahoo Finance said that Metropolitan areas like New York City have banned short-term rentals causing hotel prices to rise roughly 10% on a year-over-year basis since the ban was implemented, further enhancing RevPAR growth. These short term rental bans and restrictions are becoming more and more common throughout the U.S. San Francisco, Santa Monica, Anaheim, and West Hollywood have also tightened restrictions on AirBnb listings making it more challenging to secure short term rental permits. Rising RevPAR, tightening short-term rental regulations, and anticipated interest rate reductions create a promising landscape for hospitality investments. Investors positioned to navigate the challenging financing climate and capitalize on these dynamics stand to gain significantly as the market adjusts to the evolving demand and supply conditions.

On the flip side, current hotel owners are facing their own set of challenges. Many investors are struggling to find financing options that allow for a cash neutral refinance. The combination of the current interest rate environment and lenders being constrained by 1.30-1.40x Debt-Service Coverage Ratio (DSCR) requirements leaves a gap forcing owners to either sell in order to repay existing loans or inject fresh equity. The situation is further exacerbated by an impending maturity wall due this year and next, totaling $42.3 billion, the third highest among all property types according to Cred IQ. This financial pressure is further heightened by the past reliance on CMBS loans (Commercial Mortgage-Backed Securities), which if refinanced in the current rate environment, would not only lock borrowers into higher interest rates but provided interest rates do come down would lead to elevated defeasance costs in future years. Many hotel investors and owners may need to sell off their assets to relieve themselves of these financial pressures or be willing to weather the storm that may or may not present a path to recovery in the near future.  

Historically, the hotel sector enjoyed a healthy influx of CMBS loans, and the rates secured in 2019-2022 hugely benefited the sector and injected it with the capital that it needed. However, the present narrative has shifted, with the hotel sector now perceived as a riskier investment compared to other asset classes like multifamily. Opportunistic investors and lenders who are still willing to lend or invest in the hospitality space are looking to charge a risk premium for the increased risk they are facing in this current period of uncertainty or look to mitigate their downside in other ways. Many large institutions and banks are playing the waiting game on deploying capital given the looming election coming in November and the Federal Reserve’s heightened caution in terms of lowering rates too quickly. This shift has led to a tightening of available capital, making it harder for hotel owners to secure the necessary funding that they need to remain profitable. Looking ahead, the looming maturities provide both challenges and incentives for lenders and hotel owners alike to renegotiate terms. The concept of “extend and pretend” is likely to become more prevalent, with lenders reluctant to take back hotel assets and investors eager to preserve their equity. 

The path to recovery for the hotel industry is paved with both golden opportunities and daunting challenges depending on your risk appetite. For prospective investors the market conditions present a ripe landscape for entry, bolstered by favorable RevPAR trends and a supply-demand imbalance. Conversely, existing hotel owners must navigate the current financial storm, facing refinancing hurdles and the looming threat of loan maturities. As the industry moves forward, the dynamics of capital markets will play a crucial role in shaping the future of hotel investment, with stakeholders on both sides of the aisle looking for innovative ways to adapt and thrive in the dynamic world of commercial real estate. With this in mind, Lever Capital Partners’s long track record in the hospitality sector allows us to guide owners and developers through these challenges. For the last 15 years, Lever Capital Partners has provided exceptional and reliable service by leveraging our strong relationships and connections to help our clients find the capital they need.

References:

https://www.cbre.com/press-releases/cbre-hotels-expects-revpar-growth-in-2024-fueled-by-higher-rates-and-stronger-demand https://cred-iq.com/blog/2023/12/13/2024-commercial-real-estate-maturity-outlook-2023-cre-loan-maturities/ https://www.costar.com/article/272132985/amount-of-maturing-hotel-cmbs-loans-balloons-this-year-after-getting-extensions https://hotelsmag.com/news/u-s-hotel-investment-set-to-accelerate-in-2024-particularly-in-top-urban-markets/ https://finance.yahoo.com/news/nycs-airbnb-ban-looked-trouble-131500196.html?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMV8xqBLs3bsrlOAn3_4KykEN5sRsq-Lw3jN2dUyTQu14a2HkpD0RK0khyBBnVF2dl75ja7YUKCFnBYYAiqxEmfC7zcIWLB-2Svd_mtps2yspHloOR0ufTVUBLLsxTk6RFZtEi0QoIbGm_BpoUkTwh0DCFDFaricn21TV6LkIa1x&guccounter=2 https://www.unfairbnb.net/airbnb-bans1

Why FinTech isn’t making a dent in Commercial Real Estate Finance Brokerage

by: Adam Horowitz

The pace of technological advancement is reshaping numerous industries, leading to significant transformations and job displacements. Yet, despite the efforts of numerous tech companies, the Commercial Real Estate Finance Brokerage industry remains largely untouched by disruptive innovations. Why is this the case?

We’ll explore what I think are the three main reasons for this:

1) At its core, commercial real estate finance is driven by relationships rather than simple matching algorithms. 

2) Lenders and investors rely on trusted sources to conduct thorough underwriting processes, which cannot be easily standardized. 

3) The human element of trust and expertise plays a crucial role in navigating the complexities of this industry.

Unlike residential mortgages, obtaining a commercial real estate loan entails a far more intricate process, involving a multitude of data points and considerations. From sponsor backgrounds to market trends, each project demands meticulous scrutiny. While technology can aid in identifying potential capital providers, it’s the expertise of individuals that ultimately ensures successful transactions.

The difficulty in standardizing the vetting process stems from the unique nature of each project. While some may appear straightforward, others require in-depth analysis of market dynamics and sponsor track records. Identifying the weak links in complex projects necessitates a discerning eye honed through experience.

Lenders have traditionally been reluctant to expand their workforce to evaluate every transaction, preferring to rely on trusted intermediaries. This reliance on expertise extends beyond mere checkboxes, as understanding the nuances of borrowers’ experiences is essential for informed decision-making.

How do I know so much about this topic? I’m a rare tech/finance guy whose undergraduate and graduate degrees focused on both business and technology. I rode the technology wave in the 90s until soon after the dot-com bubble crashed in 2000. That crash hurt more than you can imagine as I had a lot of stock options and the company I was at was going public on the NASDAQ two days after the stock market crash. I hung around for a bit longer, then moved into the CRE finance world in NYC just after 9/11.

Taking into account the knowledge that I had gained, I tried to implement as much tech as I possibly could to streamline processes, automate tasks, and focus on having the best database in the industry. I also acknowledged that you can’t stop progress so I invested in a few of those same FinTech companies that failed. Some of those investments were profitable due to increased deal flow, and others created a write-off after values went to zero.

At Lever, we use technology to help us do one thing and one thing only; to provide capital at the best available terms for our clients. If tech helps us do that then we use it, and if it does anything else, then we don’t. I look forward to seeing how tech evolves in the commercial real estate industry and we’ll continue to use it so long as it brings results to the only people that matter…our clients.