“Game of Thrones” characters once warned us that “Winter is coming.” We just didn’t know at the time that they were referring to this winter; a winter quite unlike any other, and a stark contrast to the sunny, springlike market conditions experienced in the years running up to COVID-19 hitting our shores.
And, as some borrowers are now learning the hard way, not every real estate financier is equipped to navigate the abrupt change in terrain.
“The lending environment over the last few years was like someone driving with regular tires in Florida; the sun is shining, and they can drive fast and everybody can safely be on the road,” Jason Bordenick, a managing director at Maxim Capital Group, said. “Right now, you’re not seeing the same distress you saw in 2009, when there was heavy snow and everybody had to get off the road, but there’s certainly a layer of ice and sleet. So, the guys that can only drive in perfect conditions can’t lend right now and are off to the sidelines saying, ‘You know what, I don’t have snow tires. I’m going to take a pause.’ But, Maxim is built for this kind of weather.”
A Dawning of Dislocation
Brian Steiner and Adam Glick formed Maxim Capital Group in May of 2010, right on the heels of the global financial crisis. The two had been working side-by-side at boutique private lender Mercury Capital.
“I met Adam after I left J.P. Morgan, and we were running respective divisions for [Mercury],” Steiner said. “We both felt that the best lending environments and the best opportunities happen on the backside of a financial crisis, where there’s dislocation. So, after the global financial crisis, we had an opportunity to step out on our own, take our best practices, build a platform that we could call our own, and take advantage of the opportunity set that was in front of us. Fast forward, and we’re about to celebrate our 11-year anniversary.”
The firm was not named for the noun (a short expression of a fundamental moral rule), but rather for Russell Crowe’s character in “Gladiator,” Maximus Decimus Meridius. “I wanted something that represented strength and reliability,” Steiner said.
There was real distress in the market worthy of such a hero back then, and a kaleidoscope of different deals born out of the market turmoil that the new firm could sink its teeth into.
“There was a great caricature, I think it was in Bloomberg at the time, where there was a guy holding his finger in a dam,” Steiner said of the impending distress back then.
While there was an abundance of opportunistic capital looking to take advantage of the turbulence, banks were at the mercy of the regulation that followed the crisis, their hands tied, leaving room for a new set of lenders to pull up a chair at the table.
“We understood that the alternative lending environment was going to be the only solution that was going to help [the market] facilitate those opportunistic or distressed-type situations,” Steiner said. “There was such a lack of competition back then and you were able to achieve outsized returns when the market was resetting, so it was a great opportunity for us.”
Maxim was starting out with a full cycle run ahead of it, and with no legacy problems holding it back. And that was just the beginning. Today, with its nimble deal team of nine, the firm has become a stalwart transitional lender that’s now seeing its clients through a second downturn.
“It’s been amazing to watch their evolution as a firm,” Greg Freedman, co-founder of BH3 Management, said. “They started with the traditional syndication model, where they would raise money on a deal-by-deal basis from high-net-worth investors and family offices and whatnot, and they’ve transitioned to the funding model, where they have real institutional and sovereign capital that supports them. They’ve been able to do so in a way that hasn’t stripped them of their special sauce, in terms of being good deal guys that pick great sponsors and great assets. They work with those sponsors through complex transitional business plans and help execute them.”
Steiner describes Maxim as “a bank alternative, or transitional lender or bridge lender. We focus on conventional-type opportunities with unconventional circumstances.”
As for what constitutes such a circumstance, “A lot of the time, it could be timing issues, where a sponsor has a cash-flowing or close-to-stabilized-type asset, they’re in the process of closing a loan with a bank, and either something happens to the bank’s stock price or someone on the committee had a bad night the night before, and, all of a sudden, there’s lack of transparency or certainty of execution,” Steiner explained. “The sponsors are already hard on an acquisition, and the bank just drops off the face of the earth or bottoms out, and we have to come in and facilitate a closing in a very short time period.”
The past nine months have represented an extended unconventional circumstance for most, but also a unique opportunity set for Maxim, with several of its competitors running into trouble or falling by the wayside.
“Early in the pandemic, a sponsor that we know very well had a loan from a public company that had seen their share price drop by over 50 percent in a matter of days. That created a liquidity issue for the lender and problems funding its obligations,” Bordenick said. “We got a call saying that the sponsor needed a short-term solution to take out that lender. We were able to give him certainty of execution that we would be there, and, in three weeks, we were able to close a low loan-to-value transaction. It was a cash-flowing asset on a large industrial asset in Queens, and we were also able to structure in reserves in case the tenant stopped paying due to COVID.”
Bordenick joined Maxim in July as a co-portfolio manager alongside Glick and Steiner. A seasoned lender, he previously held roles at Natixis, Northstar Realty Finance and Seven Valleys Capital. Bordenick was first introduced to Glick and Steiner while he was at Northstar by Sam Chang, chairman of McSam Hotel Group. Chang had recently closed a deal with Northstar and was closing another with Maxim, so he invited Bordenick to join the closing dinner — at a restaurant in Flushing, Queens — with the sneaking suspicion that the lenders would hit it off.
“I think they’re very good at what they do,” Chang said of Maxim. “We’ve done several loans with them and they’re good people who care about their borrowers, which you can’t say about every lender.”
Given his depth of experience with institutional investors, what Bordenick brings to the group is more visibility to the bigger market players, Freedman said: “A group like Maxim that has the right accoutrements, in terms of how they execute and underwrite, can play in a much bigger space. And, I think that Jason, with his background, really brings that to the firm.”
The firm continues to close transactions during COVID. It currently manages multiple discretionary pools of capital and — unlike several of its competitors — doesn’t use asset-level leverage. As such, “we control our own destiny with our capital, and we don’t have to answer to anyone except our investors,” Bordenick said. “We don’t have a bank telling us, ‘We don’t want this [asset] on your repo line.’ That’s given us flexibility and the certainty of execution, and it’s why we’ve been so strong throughout 2020.”
As Jeffrey Simpson, a managing partner of Arch Companies, puts it: “If they say they want to do a deal, they’re closing that deal.”
That peace of mind is critical for borrowers today, Simpson said. “These times are a little unusual, but during normal times, when you buy a property in New York, you have to put down a non-refundable deposit when you sign a contract — typically 10 percent — that you’ll never see again [if the deal falls through], unless you want to litigate. So, if your lender is not there to close with you, it can leave you in a very bad position. Maxim has never come to us at the last minute saying they want to retrade us, or asked for a better deal for themselves. I think Brian and Adam have been successful in taking risks above and beyond what traditional bridge lenders do, and price their deals in a way that will make the deal work for all sides,” he added.
Freedman’s BH3 closed on an $8 million, non-performing loan acquisition that Maxim financed during the pandemic. “That was a relatively small deal,” Freedman said, noting that Maxim runs the gamut when it comes to transactions, having also provided a $102 million construction loan for BH3’s Privé Island, a property comprised of two 16-story towers with 80 residences each on an 8-acre island in Aventura, Fla.
Indeed, while middle-market loans are the firm’s norm, it’s always happy to pick off a larger deal.
“We closed a $61 million loan on Tuesday, and on Wednesday, we signed a term sheet for a $2 million loan for a repeat borrower,” Glick said. “Ultimately, it’s all about that relationship and doing right by our borrowers so they continue to come back to us.”
Echoing Simpson’s sentiments, Freedman said Maxim picks and chooses its lending spots very carefully, and its team truly understands the nuances of real estate, “unlike a lot of these other institutional guys that have come into the business following the last downturn,” he said. “They recognize that in real estate, things change and borrowers need to be nimble and require a counterparty on the lending side that can also be nimble with them, whether it’s schedules changing, or budgets changing, or programming changing for various reasons tied to tenants, or users, or market conditions.”
As Robert Verrone, a principal of Iron Hound Management, puts it: “There are a lot of lenders that talk about closing loans when times are good but borrowers remember the lenders that can step up when markets are frozen. Iron Hound closed a loan for an important client of ours during the pandemic and I never had any doubt that Maxim would would get it done. They came up with a practical structure that worked for everyone and solved a maturity issue.”
The fact that the team has been around the block also sets them apart from the herd, Freedman said. “By our estimation, as much as 90 percent of the capital that is now in the bridge lending space has not experienced a downturn previously,” he said. “Whereas, the Maxim guys have navigated through it and know how to structure and prepare for it. Anyone that came into the space post-2010 has had a relatively nice ride. Up until now.”
Another distinguishing factor, Freedman said, is that a lot of other firms in the bridge lending space are in the business of trying to juice their yields, and deploy as much capital as possible.
“Some lenders use massive amounts of leverage or repo facilities, and Maxim has never done that. It allows them to be more nimble with their borrowers and work with their borrowers when they need to,” Freedman said. “The business itself is called bridge lending, which means it’s transitional in its very nature. So, to have to have a transitional deal, but have a lender that can’t transition with you as things change, is a bad recipe for a lot of people.”
Steiner puts the firm’s longevity down to experience and a reciprocal trust and reliance on the sponsors it finances.
“There’s a code of ethics and fundamental investing that we live by,” Steiner said. “It’s great to make the lowest leverage loan at the highest rates possible. But, ultimately, you need to have a strong fundamental alignment of interest with your sponsor to help them execute their business plan, because if they’re successful, you’re getting your money back. You can have the greatest piece of real estate in the world, but if you don’t have the right jockey, you’re going to be stuck.”
As a result, Maxim doesn’t participate in mass-marketed debt opportunity offerings.
“That’s just a race to the bottom in terms of price and lack of loan covenants,” Bordenick said. “Ultimately, nobody really wins there except the broker, because the lender with the cheapest pricing doesn’t necessarily make them the right lender. We rely on our expertise in getting creative and being in the trenches with borrowers. We’re all in it together, ultimately rowing in the same direction to get our capital back.”
One such example was a recent deal involving Arch Companies. A tenant had signed a letter of intent and was due to sign its lease before the loan closed. “During the process of closing, the tenant wasn’t proceeding forward,” Arch’s Simpson said. “Essentially, we together — but I would say Maxim definitely led the charge — came up with a creative solution to keep things status quo. We had certain obligations to fill in the gap and timeframes, but they worked with us creatively to close the loan, in the same way that they would have had the tenant not fall out. The natural solution for some lenders would be: ‘Okay, the tenant’s gone, so let’s cut proceeds.’ But, that was not their mantra at all.”
Another borrower-friendly advantage is that Maxim services and controls its loan portfolio in-house.
“It’s proven to be an invaluable resource over our entire business,” Glick said. “A lot of lenders get into trouble when they contract out to a third party and lose one-to-one connectivity with the sponsors. Being that we’re a very low-leverage lender, our sponsors generally have 40 to 50 cents of real cash equity in the transaction that also keeps them highly aligned and highly focused in making sure that we continue to receive payments. We’ve shied away from the higher-cap-rate assets, where people are chasing leverage to generate a promote or a carry. That’s a recipe for disaster when the music stops.”
The personal touch when it comes to borrower interaction is part of a broader approach to Maxim’s client relationships.
“There are lenders out there — and I won’t name names —who you’ll get a random letter from alleging a default and you’ll say, ‘Wait, what are you talking about?!’ That’d never happen with Maxim,” Simpson said. “They may send a letter if it’s necessary, of course, but they would call you first and say, ‘Hey, we looked at the loan documents, and X is supposed to happen at Y time. Can you explain to me what’s going on?’ They work with you.”
New York State of Mind
While New York’s appeal has been temporarily blighted by the pandemic, Maxim has continued to transact in the city it calls home.
“We’ve closed a bunch of transactions over the last 45 days or so, ranging from a parking garage in the city to a development site in NoMad,” Glick said. “We also did a mixed-use property in Long Island City, where we have for-sale condominium units upstairs. A lot of lenders are concerned about for-sale condos, but we were able to get past it, knowing that 25 percent of the units were under contract, and most of them were put under contract during the pandemic. So, our basis is an extremely low one.”
Maxim’s confidence in financing transitional New York real estate also derives from the founders’ experience in downturns, Simpson said.
“I think most of us that have been around for a couple of cycles know that a market like New York will always recover,” he said. “The question is, what the recovery will look like. But, New York has always been a leader and it always rebounds. And, when you’ve experienced that, you can continue to do business.”
“We haven’t necessarily had to dramatically shift our business from what we were doing pre-pandemic,” Glick said. “At the end of the day, we are doing a very basic business. We’re lending senior secured debt on fungible real estate assets. We just think that we do it better than some of our competitors.”
Speaking of competition, Bordenick noted the endless supply of bridge lending newcomers as the previous cycle went into extra time.
“A new group would pop up every week. They’d take a color and a mineral, put the two things together, and that was the name of their company,” he said. “They were out there lending, but many didn’t have the wherewithal or the capital, and were just chasing yield. I think that this pandemic has absolutely weeded all of those guys out, and the long-standing, deeper-pocketed guys who have been in the business long term, who have staying power, are the ones that you still hear about today.”
“There are a lot of people who did well over the last few years as simply real estate traders, financially engineering returns to repo lines through the capital markets,” Bordenick added. “We’re not traders. We’re commercial real estate lenders and in this for the long term. We’re looking to make a loan, have fun at a closing dinner, and get repaid. That’s all we’re trying to do.”
Verrone said he expects Maxim’s business “to be a beneficiary of a debt market that requires thoughtful and reliable leverage.”
Back to the Future
As the COVID-19 storm rages on, Glick is seeing some market behavior parallels between the GFC and the pandemic, despite the two crises being very different animals. One, in particular, is supplementing Maxim’s bridge lending business nicely.
“In 2010 through 2014, note-on-note financing was a pretty active part of our business,” Glick said. “It really dried up, but now it’s picked up again and we’re seeing more opportunities on that side. We’re even getting calls from some of our old sponsors who used to acquire notes saying, ‘Get ready.’”
Glick said he’s hearing about a lot of opportunistic credit funds globally that are building war chests to try to take advantage of the distress, or the appearance of it, although they could be disappointed.
“It’s going to be very telling how much actually comes to light in 2021,” he said. “I think that a lot of the guys who are aggregating extremely large pools of capital won’t get as much action as they think. There’s just so much capital on the sidelines, and so much regulation and restrictions put in place to help pad shocks. It’s not like 2008, where you woke up and the bottom had dropped out.”
By: Cathy Cunningham