By Ben Kadish, Maverick Commercial Mortgage
Sometimes, “the good ole’ days” are right now. For commercial mortgage borrowers, it’s likely that conditions are better now than they will be for several years. While we may have dodged the bullet of rising interest rates in early February, rates are headed up, and the only question is when. Couple that with bank lenders’ pulling back from the free-flowing capital of recent years, and it’s getting harder and harder to fund a new development or investment. While the new administration says all of the red tape is going away to get banks to make more loans, that is going to take a while.
And yet, there’s still plenty of capital in the market—you just have to know where to find it. By asking the right questions, you’ll have a better shot at funding your project. Here are a few factors all borrowers should take into consideration this year:
- Expect tighter lending criteria from banks. Many borrowers once had direct relationships with their commercial real estate bankers. However, many banks are out of the market entirely, or have severely constrained the amount of capital planned for commercial real estate this year. Guidance a borrower received last year for an investment pro-forma may no longer apply.
- Consider non-traditional lenders. Private equity firms and other private sources of capital are leaning in where banks are leaning back. There’s capital to invest in the right projects, for proven investors and developers.
- Timing is everything. Moving forward now, before interest rates rise, can help make the numbers add up. While there is much to be considered, rates should be at the top of the list when balancing factors and determining when to move forward. When rates go up, loan amounts get cut. Borrow while there are still lenders in the market funding loans with low rates.
- Lock in rates if you can. If your project qualifies for a fixed rate, you’ll want to seriously consider taking it, working on the assumption that today’s rate is likely significantly lower than what you will be offered in three, six or certainly twelve months.
- Embrace complexity. You may have expected a simple bank loan to cover a project. When that’s no longer possible, think about other options like SBA loans, private equity funding, mezzanine or preferred equity or GSA funding (when applicable).
- All projects are not created equal. Just because one project is turned down, doesn’t mean sources of capital won’t be enthusiastic about the next one. We are not in a 2009-type situation where there is no funding for anything; there is actually capital very interested in real estate. However, most sources of capital – debt or equity – have very specific parameters they must meet.
Many borrowers are facing the need to refinance loans from 2007 or 2008, and are feeling the urgency to recapitalize. While the process this year may not be as easy as during the last few years, there’s no reason to think that deals can’t be done. We expect there to be robust activity from private sources of capital, some activity in the CMBS markets, opportunities with life insurance companies—and yes, even some lending from banks.
It’s a year to keep an open mind, and don’t be afraid to ask for help in connecting with new sources of capital, and to think outside the box in terms of funding new projects or refinancing old loans. It is our job to navigate the market and the documentation process for our clients.
Ben Kadish is the president and founder of Maverick Commercial Mortgage in Chicago. He has more than 34 years of experience in the mortgage banking business.