Distressed properties are problematic, for reasons economic and demographic. The economic rebound hasn’t been across-the-board, and the propensity for millennials and companies hiring them to gravitate toward urban areas has resulted in suburban landscapes with vacant office buildings.
Conventional lenders continue to demonstrate an aversion to financing distressed properties, paving the way for bridge lenders to provide the funding to get these properties functional, repurposed if necessary, and at full potential.
The last recession had an impact difficult to overcome. One emerging problem was property owners, for financial reasons, had difficulty maintaining their properties. Thus, the market saw more instances of investors acquiring sub-standard multifamily, office buildings, hotels, and retail assets.
That was especially problematic for hotel owners whose properties no longer complied with standards required by hotel chains. Needing financing to improve their properties, operators began approaching lenders for funding, if only for cosmetic improvements.
It was also problematic for retail. Investors have been acquiring run-down centers, many suffering from closure of major tenants like Circuit City and Linens ‘n’ Things. And Internet retailing, or e-tailing, continues to damage brick-and-mortar retail.
Generally, across all property sectors, investors have the opportunity to upgrade or reposition these assets. In reality, most banks stay away because such properties may have been acquired for a fraction of the value of the repositioned property. To them, the borrower doesn’t have enough equity in the deal.
A bridge lender will make that loan. Once the property is upgraded, that loan is replaced by conventional financing when the property meets traditional lenders’ requirements.
One key advantage bridge lenders offer is closing loans quickly. Another: Bridge lenders are more willing to look beyond the present to future values, providing the basis for required short-term financing so that loan can be taken out with a conduit lender or permanent financing.
In Allentown, PA, $5 million in financing was secured by two hotels, utilized for a discounted payoff of existing debt after the borrower was rejected by conventional lenders. Also, the properties are situated in a secondary market, and conventional lenders typically look to finance in primary markets.
Bridge lenders routinely assist borrowers with out-of-the-ordinary situational loans. Here, the properties are operated by experienced owner/operators under the Holiday Inn banner. Continued hospitality growth in the market factored into a decision to provide funding. Bottom line: If a borrower has a strong track record, the bridge lender will take the long view.
Another example: Silver Arch provided $12.6 million for development of an 81-acre site in Mansfield, TX. The borrower was under contract to acquire the property, requiring funding to complete the acquisition. While the transaction made sense, that it was speculative made it unattractive to traditional lenders. The potential fell into the focus of a bridge lender—providing bridge financing outside traditional sources to visionary developer/owners.
Conventional lenders do generally like multifamily, retail and office properties, but are turned off by “negatives.” Bridge lenders looking at the upside fill the gap, realizing there may be a higher loan-to-value ratio initially, but setting aside money to improve the asset so LTV will go down and the borrower can refinance.
The bottom line in lending for distressed properties: Bridge lenders provide borrowers unable to obtain financing from traditional sources the opportunity to obtain financing and jump-start their properties. Savvy buyers and investors need funding to make projects work, and bridge lenders can make that happen.
Jeffrey Wolfer is president and CEO of Silver Arch Capital Partners.