Friends with Benefits….
How Peer-to-Peer lending is changing the game. We all know that the CRE lending marketplace is changing. New bank regulations have traditional lenders on edge and hesitant to provide financing. However, you can’t expect the market to stop, so what does that mean for borrowers? Look for alternative options. Many non-traditional lenders are getting in the game as they have the capital to provide financing but are not bound to as many regulatory restrictions. This gives CRE borrowers more flexibility in their investments and offers them the freedom to pursue opportunities.
When there’s a problem, capitalism will always find a solution.
Market experts suggest that there could be a slowdown in the near future in real estate values. Certain groups that have traditionally been owner-developers have decided to sell their real estate into the rising tide, and instead of exchanging into another CRE asset at a 4% cap, they are deploying that capital into bridge and construction loans to their peers at yields of 6% to 10%, and sometimes higher when factoring in points. We’ve seen a growing trend of commercial real estate developers offering peer-to-peer lending to their colleagues. Developers lending money to their competitors for their projects…that doesn’t make sense, right?
Actually, when you start thinking about it, it makes a whole lot of sense. Here’s why.
Developers are uniquely positioned to lend. Not only do they have a closer handle on the valuation of an investment, they would also be able to continue a project should their borrower default. Their insight into the industry coupled with their more limited risk exposure makes them a prime source of financing. Personal relationships are also playing a key role. Developers are notably less rigid when arranging a loan, offering a smoother financing transaction that can be secured swiftly.
Mezzanine lending is getting top billing.In this new lending arena, developer-lenders are gravitating towards mezzanine lending.
Typically, these loans have higher rates and provide a greater ROI, with the associated risks of course. However, because developers have the ability to continue a project in the event their borrower defaults, it removes some of the risk exposure that more traditional lenders would face. This is also beneficial if a borrower needs to secure senior debt in the future. Having a developer as the mezzanine financier (one who could continue the project if needed), makes a lender more inclined to provide a senior loan. This makes having a developer-lender an even more attractive source of funds.
Where do we go from here?
With developers on both sides of the table eager to engage in peer-to-peer lending, it’s important to have the right guidance while pursuing a transaction. Over the past year, Progress Capital Advisors has been working with developer-lenders to understand their lending criteria in order to match them with the best opportunities. This has been particularly true with construction lending. As traditional lenders are pulling back due to Basel III HVCRE rules and tighter underwriting standards, the deals that are being made in the peer-to-peer space are increasing. Give us a call if you are interested in hearing more about what we see as a very important tool to bridge the gap between traditional and non-traditional financing sources.
Kathy Anderson is President and Founder of Progress Capital Advisors.