Envoy discusses construction, bridging loans and the future of the net lease

Ralph Cram, President and Director of Envoy Net Lease Partners LLC, is responsible for providing strategy, marketing and investment advice on all aspects of net rental real estate investments. He believes 2021 will be a banner year for net lease, and that Envoy is particularly well suited when it comes to providing a “one-stop-shop” for developers.

Financial overview: How is Envoy different from a “normal” commercial real estate finance provider?

Stuff: Envoy focuses on construction and bridging loans on single tenant and net lease properties in most segments of commercial real estate such as retail, restaurant, medical and industrial properties.

What sets us apart from most lenders is that Envoy can lend up to 100% of total project costs. A developer receives all of the project capital from a single source without having to involve outside investors and a tedious Joint Venture (JV) and related agreements. Envoy’s “one-stop-shop” allows developers to focus on what they do best and provides all of the funding and other capital considerations for a given project.

Second, the only thing we do is lend on net rental properties, so we are the experts. We don’t do an apartment loan one day and a PPP loan the next day. We don’t go, don’t go in and then exit the net lease market again and go lend on other types of properties or stop our lending during times like COVID-19. Net rental home loan is all we do. We Often times tenants know new lease clauses before others because we see leases from across the country with the same tenant.

Third, this streamlined approach allows us to be quick, especially with regular borrowers. We have taken out construction loans within three weeks, on occasion, for our loyal customers.

Fourth, we can go anywhere our borrowing clients want to go across the country. We do not have the problem of lending territories that we often encounter with local bankers. Many of our clients have tenants who take them across the country building stores for them. Our clients don’t need to find a new lender – when they leave their home market, Envoy follows them almost everywhere in the continental United States.

FI: Why do net lease developers need specialized finance products?

Stuff: Knowledge, speed and comprehensive capital solutions. Net lease developers are always at a bad deal of losing their tenant relationships. Envoy reduces last minute surprises because we know the issues and because we only deal with net rental projects. Bad reviews don’t stop us. As I mentioned, we can follow the developers all over the country. We enter into and maintain Envoy loans in-house, so that we can resolve issues quickly. Our borrowers deal directly with the decision makers and the source of capital.

And yes, we give the developer all the capital they need to complete the project once they’re ready for construction. No need to share the profits with investors. No need to negotiate complex joint venture agreements or find mezz or subordinate financing. Failure to provide updates to multiple investors and accounting or other investor issues. Our construction loan product does not take into account backend profit splits. The developer keeps the profit on the rise for himself.

FI: What kinds of conditions do your products carry? Why are they beneficial for your sponsors compared to traditional funding methods?

Stuff: We like to say Envoy debt is expensive, but it’s cheap equity. When you combine bank debt with joint venture requirements from other sources versus our total cost of capital, Envoy is generally less expensive. Regarding terms: Our typical construction loans have a set-up charge of 1-2 points, an interest rate of 8-9%, and an exit charge of 0.5-1.0%. The price is determined by the credit score of the tenant, the size of the transaction and the potential transaction volume for repeat business with the customer. Our loan terms are generally 12 to 15 months, with several extension options. For quality tenants, today we can achieve prices below 10% all inclusive with a proven pipeline and transaction volume.

FI: The net rental industry has been on fire for two years. How has this affected your business?

Stuff: Really, the fire has really turned into a wildfire since last summer, especially for long-term investment grade net leasehold properties. In 2021, our developers with top quality tenants are repaying loans within 30 days of the start of the lease and as a result loans are being paid off faster than normal and our clients are setting new record cap rates on these sales. . The problem for net lease developers is that there are a decreasing number of tenants that grow, costs rise, and tenants want lower rent factors and better lease terms, which developers owe their money to. to give. Thus, the supply of new net rental properties will be lower this year due to COVID restrictions in 2020 and demand is even higher than in the past. The COVID-19 pandemic is creating a wave of older landlords in other market segments, particularly apartment owners, who want to sell and trade net rental properties. There are simply not enough long-term net rental properties to meet this growing demand. We don’t see this changing until 2023, unless tax laws change next year to severely restrict 1,031 tax-free trading. If these tax law changes seem plausible, there will be a huge rush to sell and trade 1,031 tax-free swap properties in 2022 before the gate closes. Add to that the billions of dollars in capital that net rental REITs raised last year, and you have a very active selling market that drives up selling prices and lower cap rates. The record sales are not over yet.

FI: What are Envoy’s criteria for funding? How should a new customer present themselves to you?

Stuff: The closing conditions for an Envoy loan include a signed NNN lease with a term of 10 years or more and ownership “out of the box” in terms of permits, use / rights and contracts. We require construction to begin within a few weeks of loan closing. We finance both investment grade tenants and some lower grade tenants up to 80 percent of the loan-to-value ratio and 100 percent of the loan-to-cost ratio. Our sweet spot is between $ 2 million and $ 8 million in loan transactions, but we can go as high as $ 20 million for some transactions.

FI: What makes Envoy different from other private lenders specializing in net leasing?

Stuff: Envoy’s cost of capital is typically 50 to 200 basis points lower than all of our competing private lenders. If we like the deal and the potential relationship, we will handily beat other private lenders. Second, other lenders in this area tend to fail to address issues, such as the delays that have been common with COVID, and they often demand immediate repayment on default or when the loan is due. Due to its sources of capital, Envoy tends to work with borrowers to maintain long-term relationships, knowing that the best solution is often in everyone’s best interests and not just an immediate and short-sighted repayment. Envoy has been in business for nine years now and has funded 79 net rental transactions. As a result, we are focused on doing business with our customers for the decade to come.

Finally, Envoy offers multiple capital solutions. So if a developer has a good project with a lower quality tenant, or a two-tenant project that does not qualify for our construction loan program, we have a JV equity program that we can fund needs. developer’s equity. Or say the developer already has a good banking relationship who is willing to lend 85% of the loan-cost at 4.0% interest rate – we have a fixed preferred share program for the last 15% of the funds own that the developer needs for the project. Envoy has several pockets of capital that can meet the capital needs of our developer clients. Other private net leasing lenders do not offer this wider range of capital solutions to their developer clients.

– This article is published as part of the Finance Insight series of REBusinessOnline. Click here to subscribe to the Finance Insight newsletter, a four-part newsletter series, followed by several video interviews delivered to your inbox in March 2021.

Priscilla C. Carnegie