loan market remains active | Los Angeles Business Journal
Photo by Hunter Kerhart
Economic uncertainty is changing lending practices, but that doesn’t mean there is no financing available for commercial real estate in Los Angeles.
The trick, however, is finding that financing and getting it on the right terms.
“Everything people used to underwrite in January and February has clearly changed now,” said Kevin Shannon, co-head of capital markets at Newmark Knight Frank. “The terms of the loan – they’re getting so drastically different from what they used to be. “
While some lenders are “afraid to give bad loans,” Shannon added, availability has improved as interest rates are still low at the federal level and small regional banks are still lending.
“This is an opportunity for us to make ourselves known to new clients,” said Hamid Hussain, president of Banc of California real estate and commercial banking.
“We are in a strong position with our portfolio,” he said. “We proactively reach out (about loans) with people who may or may not be existing customers. “
Some companies are even creating new ways of providing loans.
Brentwood-based Archway Fund and executives from Oakhurst Advisors of West Los Angeles recapitalized the fund to create Archway Capital, which will provide fixed-rate short-term debt of between $ 2 million and $ 20 million in the form of loans to interest only.
Bobby Khorshidi, chairman and CEO of Archway Capital, said the company has been under discussion for some time.
Archway and Oakhurst, he said, understood that a recession was coming and “wanted to position the business so that we no longer rely on original loans” for individuals and instead control the capital.
The group now lends to portfolios. “The moment has just coincided with Covid,” he said.
But that doesn’t mean Covid-19 hasn’t had any impact on the group’s lending practices.
Khorshidi said the company is more conservative in lending on purchases made before Covid-19 as the market has changed but less conservative in lending with 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.
“Some segments of the loan market are either closed, on hiatus or limited,” said Shlomi Ronen, managing director and founder of Dekel Capital. “Others are always trying to be active. Real estate transactions have come to a halt, which reduced the demand side of the equation. ”
Previously, banks financed 60-70% of acquisitions, he said, but today the leverage is between 50-60%.
Ronen added that lenders are unwilling 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 has 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.
Now lenders, he added, 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 raise their prices, borrowers had better wait for loans if they can.
A lot of developers are trying to wait and “see if they can get more leverage in a month or two,” Ronen said.
But some changes may persist.
“Once the loans reopen, lenders will be more conservative and maintain higher rates than they were before the crown,” Hakakha said.
Calabasas-based MREC Management, better known as Mosaic Real Estate Investors, is being more careful with its money while still making loans.
Vicky Schiff, co-founder and managing partner of the firm, said “the strong will survive” Covid-19.
In deciding which loans to give, Schiff said the company, which provided $ 2.4 billion in loans, is looking at the potential drawbacks.
The industrial and multi-family, she said, are in the best shape.
Over 50% of Mosaic loans are for construction. Schiff said new construction loans are given “in a very, very selective manner”, with an emphasis on multi-family housing 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 were really slowing the pace and focusing mainly on the multi-family,” said Schiff.
She added that Mosaic has received inquiries from new and old customers.
“We are interested in providing capital to strong operators, and maybe that could be capital that they couldn’t get from traditional lenders, maybe because their traditional lenders have stepped back,” he said. she declared.
Schiff also said there had been an increase in the flow of transactions since the arrival of Covid-19.
For banks, CRE’s financing approach is now very variable. Some banks that focus on lending portfolios in more stable areas, such as residential, can afford to continue lending.
“We have tightened our underwriting criteria, but we are accepting new applications,” said Simone Lagomarsino, president and CEO of Luther Burbank Corp.
Luther Burbank’s bank headquarters are located in Gardena, although the bank’s head office is in Santa Rosa. About 96% of the company’s loans are in residential real estate, including multi-family, which Lagomarsino says gives it confidence in the stability of the portfolio.
“We entered this with a housing shortage in general,” she said. “We are going to come out with a housing shortage.
Lagomarsino said Luther Burbank faces a problem common to any commercial real estate lender in today’s environment – abstentions.
Without money to pay their rent, many newly unemployed tenants have had to ask for payment deferrals. In the multi-family, this spills over to lenders in the form of deferred mortgage payments.
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 damaged, as well as for banks, which can become targets for regulators after having accumulated too much problematic debt.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES, suspended this reporting requirement.
“This has been beneficial for the banks,” said Lagomarsino, who added that his bank has been active in issuing deferrals to borrowers who may demonstrate economic hardship related to Covid.
Deferred payments are added to the borrower’s principal, with a new rate based on earnings, according to the CEO of Luther Burbank.
Cool on Retail
Other banks offering a wider range of types of CRE loans face more complex situations.
About 44% of Chinatown-based Cathay General Bancorp’s total loan portfolio is made up of CRE. Of that total, nearly a quarter is in retail, while other problem areas like hotels and restaurants account for about 6.5% of the bank’s total commercial mortgage loans.
Cathay’s COO Chang Liu said the low loan-to-value ratios of the bank’s commercial real estate portfolio – which averaged around 50% – made his company relatively confident in its stability.
Despite this, Cathay typically pulls out of new loans to new clients, according to Liu.
“We are focusing more on our current relationship,” he said. “For existing customers with this (established) track record, we are reviewing new CRE transactions.”
The bank also listens to its existing customers by addressing 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 is keen to attract new business is industrial property lending, especially related to e-commerce.
“It’s not currently a big area for us now,” he said, “but we are looking to develop it. “
Banc of California, meanwhile, has generally taken a more optimistic stance on new loans, seeking to use the current situation to attract new customers.
Despite this, some areas will still be largely off-limits to the Santa Ana-based bank in the coming months.
“We’re not going to say no to retail and the hotel outright,” Hussain said, “but doing these kinds of deals will be more difficult because of the environment.”
Approximately 14% of the approximately $ 2.3 billion CRE and Banc of California multi-family property portfolio is made up of retail properties.
Beyond the categories of problems, however, the bank is actively seeking new loans to new customers.
Hussain said the relative shortage of commercial real estate financing could make people or businesses who had never worked with his institution more open to trying a new lending partner. His bank’s bet is that these borrowers will then form ongoing relationships long after the downturn caused by the pandemic is over.
“Real estate is a cyclical business,” added Hussain. “As a strong bank, these are the kinds of times when you gain market share.”
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