Presented at CREW Miami’s Luncheon Meeting, May 23, 2018
Moderator: Vivian de las Cuevas-Diaz, Partner, Holland and Knight
Panelists: Melissa Rose, Managing Director, Ackman-Ziff Real Estate Capital Advisors
Lillian Fahr, Senior VP, SE Territory Manager in Middle Market Banking, Wells Fargo Lisa DeMarco, Director of Originations, American Real Estate Capital
Javier Herrera, Vice President of Originations, BridgeInvest
Panelists began by describing the particular niche markets their companies finance. Herrera cited land, short term ground-up loans for hotels and retail, and major opportunities in secondary and tertiary markets (12 to 24 months, but can go to 30) at an average rate of 10%. As his firm’s name suggests, bridge loans are their niche. DeMarco, who is with American Capital Real Estate, a life insurance company, said their broad range includes marinas, waterparks, and mobile home parks. Fahr, who handles middle market loans at Wells Fargo, said that they look at performance, and mentioned convenience stores and student housing. Rose said that Ackman-Ziff does a bit of everything, from family offices to highly-leveraged construction loans, and bridge loans on new construction.
Describing today’s debt market, Fahr said the market is strong but competitors are many, with insurance companies and hedge funds grabbing deals from banks. “Community banks can offer better deals than large corporate banks,” she noted. DeMarco commented that “the pressure of rising Treasury bills is scaring nervous borrowers into seeking fixed-rate long-term financing.”
Regarding new financing structures coming into play, Rose mentioned C-PACE, an alternative-cost financing vehicle that is still in flux. [Commercial Property Assessed Clean Energy (C-PACE) financing helps commercial, industrial, multifamily, and non-profit property owners get affordable, long-term financing for green energy upgrades to their buildings.] This option is designed to put energy efficiency and renewable energy upgrades within reach for many types of businesses. Fahr does not loan on straight land or spec construction but does a “reducing revolver“ in four sections, as is typical in construction.
DeMarco’s firm likes multifamily and leased-up properties. For properties coming out of construction, they will loan using interest-only offers on earn-out, but only in strong markets. They will finance tertiary and secondary deals in areas like Austin, TX, where growth is good. Herrera’s firm comes in where all the others drop off. “We’re collateral-based, so are less stringent. We do loans that could be disastrous for others.” High loan to cost is good for him.
[The loan-to-cost (LTC) ratio compares the financing of a commercial project as offered by a loan to the cost of building the project. The loan-to-value (LTV) ratio compares the construction loan amount to the fair-market value of the project.]
How has your business changed since the 2008 downturn? Fahr replied that Wells Fargo has not changed their business, because their borrowers stay with them through thick and thin. “During the downturn we had a market share of 20% to 25%, which represented significant growth for us. We were doing CMBS [Commercial Mortgage-Backed Securities] at 10 years.”
Rose said they were loaning 90% on ground-up projects, but have reduced that to 75%, noting they are now doing loans that are less risky. DeMarco said that, with the economy doing well, they are competing against 10-year interest-only loans, which makes her nervous. “Who’s going to refinance those when rates are higher in 10 years? We focus on safe exit strategies.”
Herrera has seen zero change in BridgeInvest’s underwriting because they know exactly what types of deals are a Yes for them. “We have refined our processes though. Now we give a quick No instead of a long Maybe that was always a No.”
Regarding caps on loan amounts, Herrera replied “$5 million to $50 million; over $50 million we syndicate them.” DeMarco: “$10 million to $150 million. We get partners when loan amounts are more; the rate is never below 4%.” Fahr specified “$1 million to $20 million at 10% or more, typically at 65%– 75% LTV.” Her middle market department refers larger loans to other Wells Fargo departments. Rose said that in Florida they’ll do $5 million to $30 million, because family offices use the lower amount. “Are we safer than 2008? Moderately. Equity is much greater now so that is better overall, and more deals now are in cash. But politicians change fast enough that they keep making mistakes.”
How do you evaluate loan opportunities? Fahr said that Wells Fargo risk-rates it borrowers as well as the properties to be financed, because they want to retain borrowers for the long term. Herrera’s firm is a collateral-based lender, and he explained that “We’re story-based. We ask ‘Why did you call us?’ We don’t view them as partners because we’re not looking for repeat business. We are LIBOR-based, and more business-to-business.”
Responding to audience questions about rate swaps and exit rates, DeMarco said, “We base loans on a project’s 10-year cash flow, and check to make sure LTC is good enough for another lender to come in at the end.” Herrera avoids refinancing, emphasizing that they don’t want to do bridge-to-bridge loans because “Somebody’s going to get caught with that hot potato.”
—By Susan Cumins, CREW Miami member since 1998