How Peer-to-Peer lending is changing the game
We all know that the CRE lending marketplace is changing.
New bank regulations have resulted in stricter commercial real estate under-writing guidelines. However, you can’t expect the lending market to stall, so what does this mean for borrowers? Look for alternative options. Many 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 commercial real estate values. Owner-developers are selling their real estate, 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 making 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.
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.
5 Things to Know Before Year-End
1)CMBS lenders are aggressively closing loans and rushing portfolios to market prior to December 24th when the 5% risk retention rules take effect. While many CMBS lenders who are banks have the balance sheets to cover risk retention, shops without balance sheets will need to adjust credit underwriting standards. A Progress Capital client signed a $70 million CMBS application letter on October 10th with a closing scheduled on or about October 31st. It doesn’t get much faster than that.
2) Agencies (Fannie and Freddie) are open for business and have become more competitive with banks and insurance companies. In fact, several Agency programs (including the SBL Program) are offering incentives, rebates and capped closing costs for applications signed before year-end.
3) Bank Quotas have been achieved at most lending institutions, so banks are being more selective on deals they commit to close between now and year-end. Once the New Year rolls in, fresh quotas will again drive lending volume, although be prepared for lenders to remain cautious on construction and adhere to tighter credit underwriting standards in 2017.
4) Interest Rates are expected to rise as evidenced by the recent uptick in Treasury and Swap rates. The Federal Reserve is scheduled to meet again on November 1st and December 13th at which time it is anticipated there will be a rate hike.
5) As year-end approaches, it’s a good time to assess your portfolio as to upcoming loan maturities, current interest rates and prepayment penalties to see if there are any adjustments that should be made heading into 2017.