Commercial real estate borrowers with a penchant to acquire and reposition undermanaged assets are seeing more opportunities for bridge loan financing.
Berkadia Commercial Mortgage LLC, Horsham, Pa., recently announced its new floating-rate commercial mortgage program, a bridge loan for eligible borrowers seeking to acquire or reposition properties using non-recourse commercial mortgage debt. Berkadia will service the loans and seek to provide permanent financing upon stabilization of the properties’ operations.
Hugh Frater, CEO of Berkadia, said the company is “filling a void in the marketplace. These are exactly the types of loans that borrowers want and need right now,” he said.
Gregg Winter, founder and managing partner at W Financial, New York, said more owners and developers will use a bridge loan to accomplish a strategic goal and replace the bridge loan with a permanent mortgage at a reduced rate.
“Today, we are seeing transactions that may end up as ordinary acquisitions and first-mortgage financings but start out as a note acquisition,” Winter said. “Along the way, the party purchasing the note may get lucky and make a deal with the party who is losing the property to buy the deed so that they do not have to go through a foreclosure after they buy the note.”
Winter said many times, speed drives the transactions; bridge loans can close within two weeks as opposed to 60 or 90 days for a mortgage. “As we see the market start to recover and the velocity of transactions begin to increase, very often, when a deal is finally struck, speed is an important component of it,” he said.
From a security standpoint, bridge lending is a “perfect opportunity” at the bottom of the real estate cycle with trends heading upwards, said Joseph Franzetti, senior vice president at Berkadia.
“Having come out of a period with no capital available and depressed values, we see opportunities at this point for people buying properties at very attractive prices and in the process of recapitalizing the asset,” Franzetti said. “There is a lot of upside in the property by not buying it at heightened values.”
Berkadia’s non-recourse bridge loans, LIBOR-based, floating-rate commercial mortgages with terms typically two-to-three years, focus on middle-market lending opportunities. The loans range from $10 million to $20 million, with leverage up to 75 percent loan-to-value.
More than 95 percent of W Financial bridge loans close in the New York City area, a primary commercial real estate market and one with opportunities that include multifamily--co-op and condo units, mixed-use and retail properties. Winter said, however, that more financial institutions will inevitably turn to bridge loans because banks are already increasing competition for “solid assets and solid borrowers.”
“That is inevitably going to trickle down to the private lending space,” Winter said.
Berkadia’s loans will finance and recapitalize commercial properties in all the core commercial property types, including office, industrial, retail and multifamily, and provide Berkadia with an inside track toward holding the first mortgage once the property stabilizes.
“It positions us very well to get permanent financing,” Franzetti said. “We know the asset, and the borrower has an economic incentive to do the permanent [loan] with us. [The borrower] knows our documents so, from an efficiency point-of-view, it’s there. Also, on bridge loans, there are exit fees to pay if we did not do the refinancing.”
Franzetti said bridge financing will apply to distressed assets for borrowers to stabilize the asset, and few firms are lending in the “$10 [million] to $20 million space.” He noted that while Berkadia is not looking at tertiary markets, it will focus on “sponsors who know how to manage their market” and assets that need better management and recapitalization to add value to the property.
“This loan program will help recapitalize a lot of troubled assets,” Franzetti said. “When looking at loan maturities in the next three years, whether they are CMBS [commercial mortgage-backed securities] or, more importantly, on bank balance sheets, some of these assets reentering the market will include balance sheet lenders trying to sell their loans or the properties. We think a floating-rate program for a borrower is a perfect way to help them capitalize their acquisition.”
“Borrowers needing bridge loans are finding limited opportunities, particularly for smaller balance loans,” Frater said. “In today’s environment investment banks are focusing on bigger deals and the regional banks are still working through their existing portfolios.”
W Financial’s terms range from one-to-three years for floating debt based on an index over prime. Winter said that while W Financial survived the recent downturn in commercial real estate through its focus on bridge loans, many funds that focused on subordinate lending--mezzanine loans and second mortgages--were “decimated by the recent downturn.”
“At the moment, we are not seeing all that many other [players] out there, but inevitably the lifecycle will repeat itself and the space will become more crowded over time,” Winter said.