This spring, a few months into the COVID-19 pandemic, real estate firm Arch Companies was looking to line up bridge funding as part of a deal for an apartment complex it was looking to acquire.
Getting the loan wasn’t a problem, but nailing down terms favorable enough to make the deal work was, Arch Managing Partner Jeffrey Simpson recalled.
“We had a bridge loan teed up, but the terms kept changing,” he said, noting that while the property’s seller hadn’t lowered their expectations to accommodate their new environment, the lender was now offering a lower amount in proceeds at a higher rate.
“I don’t think that lender was wrong in adjusting their terms, but we just couldn’t make it pencil,” Simpson said. “So, we said, no thanks.”
After an initial freeze in lending following the pandemic’s first days, the bridge debt business has thawed considerably. Bridge lenders, though, are still being pickier about which sponsors and projects they loan to and are charging higher rates than they were pre-pandemic.
“Early on in the pandemic, most lenders were surveying their book and really getting an understanding of the exposure they had,” RXR Realty President Michael Maturo said. “There was not much going on at all in terms of bridge lending. Things kind of consolidated pretty quickly.”
More recently, “the banks, some of the funds, have opened up and started lending again,” Maturo said. “So, you have lenders now that are making transition loans on new deals but generally speaking to borrowers that they have relationships with, that they are comfortable with. So, it’s a smaller group.”
One factor driving this selectivity is that bridge lenders aren’t as easily able to securitize portions of their loans as they could pre-COVID, Simpson noted.
“Most folks in the bridge business have some sort of a warehouse facility, a CLO, a REIT, some way to lay off a significant piece of their bridge,” he said. “When COVID hit … liquidity became scarce very, very quickly; and for the groups that had these warehouse facilities and ways of laying off big pieces of their bridge loans, that became very difficult very quickly.”
Some bridge lenders simply stopped lending, Simpson said, while others continued but also became much more selective. “And, in almost all cases, [bridge debt] became more expensive overnight, because the amount of financing these bridge lenders could achieve dropped immediately, because banks pulled back from the warehouse facilities and said, ‘Hey, we better get more conservative.’”
Daniel Ridloff, director at Slate Property Group, said that he has seen competition among other bridge lenders shrink during the pandemic, reflecting the tightness Simpson and Maturo observed.
“Deals that we looked at nine months ago that we liked in this bridge capacity, we were one of 10 bidders that were bidding on the financing,” he said. “And I would say that for the same type of deal profile today, we are one of three.”
Ridloff noted that Slate’s lending platform has always targeted residential development primarily, which kept it away from areas like hospitality or office that lenders are currently wary of.
In particular, he said the company felt its focus on lending for ground-up construction was well-suited to the current moment, given that the market will have had some time to recover before units being started right now begin leasing or sales.
“I think for the first time in real estate, at least in my lifetime, a completed building isn’t necessarily more valuable than a property under construction,” Ridloff said. “Normally, you would never say that. But, you would almost rather be in development now and delivering in two years than be complete now and having to lease through these times.”
Simpson said that in the 12 months preceding the pandemic, Arch borrowed roughly $100 million in bridge loans for the purchase of multifamily apartments in the Southeast. As Commercial Observer previously reported, in December 2019, the company secured $61.5 million in bridge financing from Walker & Dunlop to acquire a portfolio of 1,125 apartment units in four buildings in North Carolina and South Carolina, with plans to renovate the units and replace the bridge debt with permanent debt backed by Fannie Mae. In October 2019, Arch closed on $34 million in bridge funding from Walker & Dunlop to purchase a 692-unit apartment complex in Jacksonville, Fla.
Simpson said Arch took out a $55 million bridge loan several months ago as part of a joint venture, but added that the company had considered and passed on a number of other deals for bridge debt.
“We’ve looked at, we’ve even been under term sheet for bridge loans, but we haven’t actually closed them,” he said.
Simpson said Arch was currently working on a “hundred-something-million-dollar” deal that needs a bridge loan due to vacancies caused by what he described as a combination of partnership issues and the pandemic.
Generally speaking, “bridge lenders are very much reluctant to make that loan,” he said, but added that the company had approached a lender “that knows us, trusts us, that we have executed with before, and they seem pretty open-minded about working with us on that deal.”
By contrast, sponsors without a solid track record with a borrower may struggle to find bridge funding.
Michael Lefkowitz, managing member at law firm Rosenberg & Estis, said that less-established developers who launched projects pre-pandemic are having difficulty lining up bridge funding, due to concerns about how well the projected value of those developments will hold up in the post-COVID world.
“These deals were starting to be planned in 2017, and started to be built in 2018 and 2019, and were looking to sell out during 2020,” he said. “And, you know, you had a couple of things going on. Before COVID, you had a slowing luxury condo market, and then COVID hits, and you really have something nobody expected, in terms of a very drastic reduction in the amount of transactions that are happening in that market.”
That has led to situations where the underlying collateral may not support the debt a developer is looking to take on, Lefkowitz said. “And, if the collateral package didn’t support the debt at a lower percentage, it’s not going to support it at a higher percentage. So, it’s not really a matter of, I’ll take more risk for a higher LTV; it’s that, I don’t know if I’ll ever get out of this if I loan you this money at whatever interest rate.”
Complicating the situation is the fact that no one can say exactly what kind of market awaits us on the other side of the pandemic.
“The counter is that there haven’t been many new starts,” Lefkowitz said. “So, I’ve heard it argued that it’s not like there is going to be new inventory added on top of the inventory that is already out there, because there has been a real stall in the amount of new construction.”
Michael Gigliotti, a senior managing director at JLL Capital Markets, said that while bridge funding may be expensive, it is available even for challenging properties.
“Say you have that really difficult kind of scenario, where someone had a maturing loan and they needed a bridge loan right now, and it was a really tough situation in, say, Manhattan with low occupancy on a multi. Is that going to be a difficult deal? Are they going to have to go to a high cost of capital?” he said. “Yeah, absolutely. But I still think it could get done.”
Dustin Stolly, vice chairman and co-head of capital markets debt and structured finance at Newmark, said that while multifamily, industrial, and life sciences were the main areas of interest for bridge debt firms, even sectors like hospitality — that bete noire of the COVID economy — had begun drawing interest from lenders intrigued by the sector’s new, lower valuations.
“Hospitality values reset pretty much immediately,” he said. “And, they are often [down] 25 to 35 percent. And so, with that in mind, if there are opportunities for folks to come in and provide rescue capital, or there are hotel investment sales … that’s a space where finance companies can get good relative yield.”
Like Simpson, Gigliotti said he thinks that the warehouse and collateralized loan obligation (CLO) markets that many bridge lenders used to securitize their loans had gotten “a little squirrely” last spring. But, he added, since then, “they have come back pretty strongly.”
Broadly speaking, he said he believed that most sponsors who could have gotten a bridge loan a year ago could still get one today, though at prices around 100 basis points more expensive than before. Bridge debt on riskier assets is pricier.
“There are some very difficult deals getting done that, a year ago, any debt fund would have done it at 3 percent that are now [getting done] at 6, 7, or 8 percent,” Gigliotti said. “There are some debt fund groups that will lend on those things and just take yield for it right now. And, if a borrower has to transact and they need to take that money, they will.”
Of course, there are exceptions. “If it’s a retail property where all the tenants aren’t paying rent, but their leases are outstanding and you can’t evict them — yeah, I don’t know if there’s a loan for that right now,” he said.
By: Adam Bonislawski