The bridge loan market is starting to heat up, as providers see more opportunity in lending to transitional assets and distress acquisitions.
Prudential Mortgage Capital Company is getting ready to re-start its floating-rate bridge loan program, which had been dormant for the last couple of years.
The company sees its biggest opportunity in lending on properties coming out of construction. The bridge program works as a sort of feeder to the company’s Fannie Mae, Freddie Mac and FHA programs, buying some time for a property to build up occupancy to qualify for an agency loan.
“This is purely for that newly constructed property that’s at 80 percent occupancy and needs to get up to 92 percent, for instance” says David Durning, senior managing director of Newark, N.J.-based PMCC. “If the borrower really wants an agency loan, then we would use this new program which is really targeted toward that kind of an exit.”
Durning believes the timing is perfect to offer such a program, given the slower absorption rates in many markets today. But another dynamic is at play. “Banks are starting to make more decisions and force outcomes with regards to their portfolios,” says Durning. “As the banks move some of their paper, people buying it will need financing, so it’s going to be a new opportunity to provide some new loans.
That jibes with what BRT Realty Trust has seen so far this year. The bridge lender provides short-term first-position loans, offering loan-to-value ratios of between 75 and 80 percent, and generally charging around 12 percent interest rates.
“We are seeing an awful lot of stabilized properties that are overleveraged and have the opportunity to pay off their loans at substantial discounts,” says Mitch Gould, executive vice president of Great Neck, N.Y.-based BRT. “And we’ve closed two loans this year for people who have purchased third-party notes.”
Earlier this year, Canyon Capital provided a $24.2 million bridge loan for Falcon Square, a 379-unit complex in Orlando, Fla. completed in late 2008 and 86 percent occupied. The developer, The Falcone Group, was offered a chance to pay off its senior construction loan at a discount in late 2009, provided that it could do so by the end of the year.
Mezzanine financing has come off the sidelines as well, to help overleveraged properties bridge the equity gap in a refinance. This includes properties just coming out of construction that probably wouldn't get an agency permanent loan without the mezzanine piece there to make the capital stack whole.
Both Fannie Mae and Freddie Mac re-introducing their mezz programs in early April. While the programs are still just beginning to get off the ground—Freddie’s program was delayed a month due to “unforeseen circumstances—GSE lenders expect the mezz to be priced in the low- to mid-teens.
The last few years have thinned the mezz provider landscape considerably. The financial engineers that promoted exotic financing systems like Collateralized Debt Obligations have pretty much left the building.
“What you see now is a back-to-basics approach,” says Jon Trauben, managing director at New York, N.Y.-based Cantor Fitzgerald. “And the mezz community is again filled with real estate people, they are the survivors.” For instance, LEM Mezzanine will soon be closing on its next large fund that will provide borrowers with another competitive source.
What’s more, several large institutions that raised opportunity funds last year have had a hard time finding distress deals at good discounts. Many of these institutions are now looking at alternative investments in the multifamily space, such as purchasing the B-pieces in Freddie Mac’s CME securitizations, and lending on mezzanine and bridge loans.
“A number of institutional players, large multifamily owners, have been active bidders on the Freddie securitization B-pieces, and a number of those players are going to be active in the mezz program they’re rolling out,” says Tom Booher, who leads the multifamily division of Pittsburgh-based PNC Real Estate. “Some of them are now also looking at hard money lending opportunities.”