Can someone explain why some owners/developers venture into lending? Is this a relatively new phenomenon since regulations have made it more difficult for banks to finance CRE deals?
I have noticed a proliferation of these financing arms (most recently The Moinian Group). If anybody can shed some light, it would be greatly appreciated.
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Can't find enough direct equity investment product to meet their returns, prices are high (broad brush statement I know), a way to play in the capital stack on properties/markets they like. The list of groups currently or wanting to put debt $ out has continued to grow
Yup, this has got to be it. Sitting on too much dry powder, maybe with a pref ticking away, can't get any deals they like so they lend to somebody with a better site/basis/whatever or in a different market with better fundamentals
Thanks for the reply! Understood. Also- is this a relatively new trend or have developers/owners been doing this for a while?
Having interacted with a few of these players who now have serious debt platforms, given where we are in the cycle (even the most optimistic RE guy will admit that its the 'later' part), a lucrative risk/reward profile is seen on the debt side.
A guy at a conference (who's part of an equity focused firm but is now raising a debt fund) told us that they were seeing transactions where the equity guy's returns were 3-4%, the first MTG guy made 8-9% while the sub-debt guy made 15%. Every deal is different, but the appeal of having the 'safety' of the debt, now coupled with good returns, makes it an attractive place to be.
Also, to be clear, a lot of these funds target sub-debt (mezz, B-notes, pref) or bridgy/transitional first mortgages. It actually makes sense for equity/development guys to play in the spaces vs. the regular finance guys given that if they have to take over an asset, they have the know-how, infrastructure and team in place to complete the project and churn out a good return.
Just my $0.02.
Yes, this is all pretty much spot on, the return/risk imbalance is a huge part of this. That last part is really one of the main reasons though. The "if" cracked me up. Go ahead and tell me Kushner and Moinian aren't salivating at the thought of taking over your project as soon as you default on some meaningless covenant. My favorite part is that they all window dress it by saying "we'll work alongside our borrowers to lend our development expertise to make the project a success!" Please.
Interestingly enough, I just returned from a conference (Coffee + Caprates) where this was discussed. Your analysis was pretty spot-on. One of the panelists was the president of Kushner who was asked about their lending platform, which has been around for about 18 months.
Who are the guys usually in the 1st position on these deals? I know from my bank, we rarely get involved in a deal if there's mezz since in the past the bank has been burned on these kinds of deals.
Seems like a smart move for these institutional owners to step into the capital stack. If the asset underperforms and misses a covenant, you can get the asset at a discount, put some money into it, lease it up, and get those fat returns.
I can't name specific firms, but to give you some context, if you are a one-stop shop debt fund (similar to what these developers are doing) you'll have a couple of different options to allocate the different parts of the cap-stack (provided that you originated the entire debt stack). Heres a few that I know of firsthand:
i) Allocate the first MTG to a different account/fund if that is an option ii) repo the first MTG iii) Securitize the first MTG via CRE CLO (though the market really is only available for MF loans at this point) - there has been at least 1 deal done that also has non-MF collateral but not sure how viable that market is (or if it is even there anymore)
I am sure there are different options and would love for others to opine on this.
I work in & with developers with financing arms.
Reasons: -We want to put money to work -Land is too expensive -Need deal flow -New business arm & means to expand footprint -Means to obtain control of property.
Deep down everyone hopes the sponsor is a "bad boy" so we can take control.
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