Lending Market Remains Active – Los Angeles Business Journal
Economic uncertainty is changing lending practices, but that doesn’t mean there isn’t financing available for commercial real estate in Los Angeles.
The trick, however, is finding that financing and getting the terms right.
“Everything that underwriters were using in January and February has clearly changed now,” said Kevin Shannon, co-head of capital markets at Newmark Knight Frank. “The loan terms – they’re getting so drastically different from what they used to be.”
While some lenders are “afraid of making bad loans,” Shannon added, availability has improved as interest rates are still low at the federal level and smaller regional banks continue to take out loans.
“This is an opportunity for us to introduce ourselves to new clients,” said Hamid Hussain, president of real estate and commercial banking at Banc of California.
“We are in a strong position with our portfolio,” he said. “We are proactively reaching out (about loans) to people who may or may not be existing customers.”
Some companies are even creating new ways to provide loans.
Brentwood-based Archway Fund and directors of Oakhurst Advisors of West Los Angeles have recapitalized the fund to create Archway Capital, which will provide short-term fixed-rate debt of between $2 million and $20 million in the form of loans interest only.
Bobby Khorshidi, president and CEO of Archway Capital, said the venture has been in discussion for some time.
Archway and Oakhurst, he said, understood that a recession was approaching and “wanted to position the business so that we were no longer dependent on the original loans” for individuals and instead controlled capital.
The group now lends to wallets. “The timing just coincided with Covid,” he said.
But that doesn’t mean Covid-19 has had no impact on the group’s lending practices.
Khorshidi said the company is more conservative when lending on purchases made before Covid-19 because the market has changed, but less conservative when lending on purchases made after recent market adjustments.
The company, he added, is particularly interested in industrial properties and value-added acquisitions.
Many lenders are still open for business – if the deal is right.
“Certain segments of the lending market are either closed, paused or constrained,” said Shlomi Ronen, managing director and founder of Dekel Capital. “Others are still trying to be active. Real estate transactions have come to a halt, which has reduced the demand side of the equation.
Previously, banks financed 60% to 70% of acquisitions, he said, but now the leverage is in the range of 50% to 60%.
Ronen added that lenders do not want to finance hotels or commercial properties, preferring industrial assets instead.
Jonathan David Hakakha of Beverly Hills-based capital advisory firm Quantum Capital Partners Inc. said that despite market challenges, the company had a busy year.
In fact, Quantum Capital has closed more deals than ever at this point in the year.
“There has been restructuring for the most part,” Hakakha said.
Lenders, he added, now want to see a “debt service reserve” – money set aside for the next six months to a year.
Hakakha said that because lenders are more conservative and raising prices, borrowers are better off waiting for loans if they can.
Many developers try to wait and “see if they can get better leverage in a month or two,” Ronen said.
But some changes may persist.
“Once lending reopens, lenders will be more conservative and keep rates higher than they were before corona,” Hakakha said.
Calabasas-based MREC Management, better known as Mosaic Real Estate Investors, is more conservative with its money while making loans.
Vicky Schiff, the company’s co-founder and managing partner, said “the fittest will survive” Covid-19.
In deciding which loans to make, Schiff said the company, which provided $2.4 billion in loans, looks at potential downsides.
Industrial and multi-family, she says, are in the best shape.
More than 50% of Mosaic’s loans are for construction. Schiff said new construction loans are being issued “very, very selectively,” with a focus on multifamily and high occupancy markets.
The terms of the loans are very different from what they were before Covid, she said.
“We were selective before, but we really slowed down and focused mostly on multifamily,” Schiff said.
She added that Mosaic receives inquiries from new customers and returning customers.
“We’re interested in providing capital to strong operators, and that might be capital that they couldn’t get from traditional lenders, maybe because their traditional lenders have taken a step back,” she said. .
Schiff also said there has been an increase in deal flow since Covid-19 hit.
For banks, the approach to financing CREs now varies considerably. Some banks that focus on loan portfolios in more stable areas, such as residential, can afford to continue lending.
“We have tightened our underwriting criteria but are accepting new applications,” said Simone Lagomarsino, president and CEO of Luther Burbank Corp.
Luther Burbank’s headquarters are located in Gardena, although the bank’s headquarters are in Santa Rosa. About 96% of the company’s loans are in residential real estate, including multifamily, which Lagomarsino says gives him confidence in the stability of the portfolio.
“We went into this business with a housing shortage in general,” she said. “We will come out of this with a housing shortage.”
Lagomarsino said Luther Burbank faces a problem common to any commercial real estate lender in the current environment — forbearance.
With no money to pay rent, many newly unemployed tenants have had to apply for payment deferrals. In multifamily, this trickles down to lenders in the form of mortgage payment delays.
Under normal circumstances, banks would generally be required to report these deferred loans as past due. This reporting becomes problematic for borrowers, whose credit is then generally degraded, as well as for banks, which can become targets for regulators after having accumulated too many problematic debts.
The Coronavirus Aid, Relief and Economic Security Act, or CARES, Act, suspended this reporting requirement.
“It’s been good for the banks,” said Lagomarsino, who added that his bank has been actively granting deferrals to borrowers who can demonstrate Covid-related economic hardship.
Deferred payments are added to the borrower’s principal, with a new rate based on the outcome, according to Luther Burbank CEO.
Cool on retail
Other banks offering a wider range of types of CRE loans face more complicated situations.
About 44% of Chinatown-based Cathay General Bancorp’s total loan portfolio is made up of CREs. Of that amount, nearly a quarter is in commercial real estate, while other problem areas like hotels and restaurants account for about 6.5% of the bank’s total commercial real estate loans.
Cathay’s chief operating officer, Chang Liu, said low loan-to-value ratios across the bank’s commercial real estate portfolio – which average around 50% – made his company relatively confident in the future. its stability.
Despite this, Cathay generally withdraws from new loans to new customers, according to Liu.
“We are more focused on our current relationships,” he said. “For existing clients with this (established) track record, we are considering new CRE transactions.”
The bank also monitors its existing customers by contacting borrowers and inquiring about their business situation.
“We want to know how they are doing,” Liu said, “and how we can help them if they are having cash flow issues in the current environment.”
He said one area where Cathay wants to attract new business is industrial property lending, particularly related to e-commerce.
“It’s currently not a big area for us now,” he said, “but we’re looking to expand it.”
Banc of California, meanwhile, has generally taken a more optimistic stance on new loans, looking to use the current situation to attract new customers.
Despite this, certain areas will still be largely off-limits to the Santa Ana-based bank in the coming months.
“We’re not going to blatantly say no to retail and hospitality,” Hussain said, “but it’s going to be more difficult to do those kinds of deals because of the environment.”
Approximately 14% of Banc of California’s approximately $2.3 billion CRE and multi-family portfolio is comprised of commercial properties.
Beyond problem categories, however, the bank is actively seeking to extend new loans to new customers.
Hussain said the relative dearth of commercial real estate financing could make people or businesses who had not previously worked with his institution more open to trying a new lending partner. His bank’s bet is that these borrowers will then build lasting relationships long after the pandemic-induced recession is over.
“Real estate is a cyclical business,” Hussain added. “As a strong bank, that’s the kind of time you gain market share.”