Real Estate Forum - October 2015

abandoned by their previous lenders late in the game. “Typically they were under application with a lender and for whatever reason the lender decided it couldn’t or wouldn’t deliver. It had a change of heart, perhaps,” he says. The volatility is also increasing the number of clients that want its fixed-rate offering, he adds.

Then there is everyone else—that is, borrowers who come to him for, well, almost any reason and not just because times have suddenly become volatile. For instance, as more companies consolidate and reconfig-ure space in office buildings, building owners are finding their parking facilities are no longer sufficient to accommodate the increase in tenants. Their answer is a new parking lot funded via a bridge loan.

Indeed, bridge loan borrowers come to a lender’s tables for all manner of reasons.

There was a borrower in the Midwest who owned two class B office buildings dating back to the 1980s in Schaumburg, IL and Milwaukee, WI. The buildings had common areas that needed immediate renovation, plus the sponsor apparently had a prospective tenant in the wings, since it needed additional capital for tenant improvements and leasing commissions immediately. The buildings averaged below 70% occupancy at closing in submarkets where the average occupancy was well above that level.

Bloomfield Capital in Birmingham, MD
and Alpha Alternatives in Chicago put
together an $8.5-million senior bridge loan,
the proceeds of which were used to pur-
chase the discounted note from the exist-
ing lender on the two buildings. The dis-
counted note purchase came to $6.6
million with additional funds for interest
and renovation reserves.

There was another borrower in Phoenix who needed to pay off a defaulted first mortgage on a multifamily property in bankruptcy.

The answer, as it turned out, was a $13.6-million first-mortgage bridge loan secured by not one but two apartment properties in Phoenix. The loan proceeds paid off the defaulted first mortgage on the property in bankruptcy, which was cross collateralized with a stable core asset in the borrower’s portfolio. The lender, New York City-based Trevian Capital, spoke on behalf of the borrower in bankruptcy court to help it secure the discounted payoff.

Trevian launched in January 2013 to fill what it saw as an unmet need in this market. Today it expects that it will have originated $200 million in volume for 2015 alone. That number, incidentally, is not a hard cap, says founder Michael Hoffenberg. There is plenty of capacity for more.

Many middle-market bridge loans, though, are made for far more benign reasons, such as renovations or construction financing. You can’t get any more typical for this product than the $13.6-million first mortgage bridge loan made earlier this year by Boston-based UC Funds. The proceeds are being used to renovate an existing 112-key La Quinta Inn in Aberdeen, MD, into an 85-key La Quinta Inn and 92-key Hampton Inn. When they are done, the renovated properties will be the newest product in the market since a 2009 development by the same sponsor.

There is another type of borrower on the market that is very much a sign of the times: developers that have picked over opportunities in gateway cities such as Washington, DC or San Francisco and decided it was time to move on to secondary or even tertiary markets for the next wave of opportunities.

The developers often have relation-
ships with local offices of national banks,
but then find that these banks are not
interested or cannot lend in, say, St.
Louis, MO or Bear, DE, says Peter Lunt,
chief investment officer of NVCapital
Advisors in Vienna, VA. So they turn to
other providers as they enter new mar-
kets, especially as their funding needs are
not as great as they would be for a project
in, say, the capital gateway city of Boston.

That is because land is so much cheaper, Lunt says. The total cost per unit to develop is about the same everywhere but luxury projects can be developed on relatively cheap tracts of land.

NVCapital, which ordinarily focuses on Washington, DC projects, has provided financing to such a project in Christiana, DE. Has it, too, come to believe that better opportunities are available elsewhere? No, asserts Lunt, although he does agree that it is getting more difficult to find such deals.

The transaction, one of the few it is funding outside of DC, is a joint venture between NVCapital Advisors and M-C Development, an affiliate of Leon N. Weiner & Associates, a Delaware homebuilder.

They are developing Emblem at Christiana, a 245-unit, nine-building luxury rental home community with a delivery date of 2016. PNC Bank is providing construction financing of $30 million and NVC and MCD have provided $12 million in equity.

“I expect we will see more of these opportunities as developers move away from the larger cities,” he said. The middle-market finance ecosystem will be an important source of support for this trend, especially if national lenders continue to limit their exposure to the Christianas of the US.

Not all, of course, will. If nothing else, national CRE lenders have learned they must go where the opportunities are. But enough will decide to bow out, attracting even more institutional investment to this segment. ◆