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CMA
June 19, 2020  

Smaller Bridge Lenders Capitalize on Crisis

The coronavirus pandemic has broadened origination opportunities for bridge lenders that previously saw few chances to bid on loans to large, institutional borrowers.

Commercial-mortgage brokers and lending pros said smaller shops are reaping the benefit of a widespread market disruption that has prompted many banks, REITs, fund operators and other commercial real estate lenders to curtail their activities in the last three months.

“I’ve been surprised by how many people still have their ‘pencils down,’ ” said Scott Waynebern, president of Limekiln Real Estate of New York. “When we are talking to brokers and borrowers, we are just not seeing a lot of people show up.” MF1 REIT, a joint venture between Limekiln and Berkshire Residential Investments of Boston, invests in bridge and mezzanine loans on apartment properties.

“Conventional lenders have really tightened their lending parameters and/or are taking a wait-and-see approach,” said Jonathan Daniel, a principal at debt-fund operator Knighthead Funding. “The supply of bridge capital available for financing real estate has dropped meaningfully.”

Industry pros noted that many of the previously active bridge lenders have reduced originations or retreated to the sidelines because it has become impossible — or at least too costly — to fund new loans by tapping repurchase facilities from banks or issuing commercial real estate CLOs.

The pullback has created a near-term opportunity “for lenders like Knighthead that hold dry powder and who are not reliant on leverage,” Daniel said. He added that the Greenwich, Conn., firm “is well positioned to finance distressed situations as they come to fruition, which is something we haven’t seen in a long time.”

An executive at another debt-fund operation said his firm recently originated some of the largest bridge loans in its history.

“Approximately eight of 10 competitors [are] relatively inactive,” the executive said. “We are still hearing them giving pricing . . . [But] we do not see many of them closing anything.” Their quotes seem to indicate they don’t want to win the loans, he added.

Bridge lenders typically write loans on transitional properties, and underwriting such debt has become far more difficult amid the economic downturn caused by the pandemic. Lenders also have been hampered by a lack of “comps” as a result of a sharp drop in both lending activity and investment-sales volume.

In the multi-family and industrial sectors, “a case can be made that those property values may actually increase based on where interest rates are today and the availability of capital for financing those asset classes,” Daniel said. “Retail, hospitality and office properties, on the other hand, are a bit more challenging in the current environment based on the unknowns.”

Either way, “if I took a transitional loan to my credit committee right now, I would get laughed at,” said one industry veteran at a major fund-management company. “The more traditional shops are not going to take a chance,” he said. However, “the smaller shops have more flexibility.”

Mezzanine lenders also are getting into the act, he noted. Amid higher rates and lower leverage, some are switching to senior bridge loans or stretching to originate them along with mezzanine debt.