cutimes.com | Credit Union Times | July 22, 2020 | 15
rent for several months. This,in turn, will negatively impact agiven property’s net income, andultimately, its short-term resalevalue.
Fully aware and fearing thattime kills deals, lenders andmortgage brokers are mediatingbetween countervailing forcesand the immediate, innate needto keep transactions movingforward.
At the same time, many lendershave put deals on hold, grindingto a halt promising transactionsin a not-that-long-ago flourishinglandscape. Lenders that have chosen to remain active have beenoverwhelmed with bottlenecks, astheir production pipelines crawlthrough obstacles created by current market dynamics.
So, where does this leave everyone? Confused for sure, and inmany cases, paralyzed by the unexpected and far-reaching natureof current events.
Despite this confusion and paralysis, options abound for themarket to move forward.
This is where private debtcomes in. Private money lendersoffer viable solutions for the commercial real estate market – forborrowers and brokers, lendersand investors – to get deals donequickly and efficiently.
Why Private Debt?
Private money lending has always thrived during economicdownturns.
While the coronavirus pandemic and its widespread economiceffects are historically unprecedented, tightening standards andrestricted liquidity in the conventional lending space are not new.During cycles when conventionallending opportunities contract,private lending expands, as borrowers and investors alike look fornew options.
It’s important to note, however, that private debt is notfully immune to the damagecaused by the severe economicimpact of COVID- 19. In the lastcouple of months, a number ofprivate debt funds and capitalproviders either temporarily orpermanently shuttered their operations due to a freeze of theircapital sources, poor underwriting practices, and/or non-performing loans, resulting from acoronavirus-related forbearanceor default.
For those that are fortunate
to be actively lending today in
the private debt environment,
the landscape is riddled with
market delays, stemming from
rate renegotiations, expanded
due diligence, short-term exten-
sions on maturing debt, re-un-
derwriting loans and arbitraging
greater spreads for investors. In
addition, since private money –
perhaps wrongfully so – tends
to be the choice of last resort,
there’s the perennial shopping
for cheaper debt by traditional
Despite those unavoidabledelays, most purchases and refinances currently in the marketrequire the execution speed thatonly private lending can deliver – agility that is proving quitebeneficial.
For example, a significant number of cash-out transactions havebeen reported, as some borrowersseek to inoculate their operatingbusinesses with cash infusions toget them through the current economic hurdle.
Some borrowers are looking atthis time to expand their financialcoffers in anticipation of ready-made, perhaps even unprecedented, shopping spree opportunities of distressed, but quality,real estate assets.
Other borrowers may be pre-
paring for what they believe could
be a slow reopening and reinte-
gration process, or a second wave
of reinfection and more closures
in the coming fall or winter
How Private Lenders AreNavigating the Landscape
Private lenders are approachingthe new market challenges in newand different ways.
Some private lenders are pressing the pause button to focus onmanaging their existing portfoliosand negotiating workouts on anynon-performing loans.
Others are actively transacting,but they are implementing modifications to their existing guidelines. The “new normal” in commercial real estate may include allor a combination of the following:• Price increases;
• Reduced loan-to-valuethresholds;
• Removal of vulnerable propertytypes, such as retail and hospitality from their pipelines;
• Reduced or eliminated subordinate financing;
• Requiring or increasing interest
• Applying full recourse in in-
stances where non-recourse
was the normal.
Another group of lenders ischoosing to not make any changes. They continue with a businessas usual mentality, enduring thedelays and disruption, and notadjusting for any perceived newmarket risks.
The Impact on Underwriting
For mortgage investors, risk liessquarely within valuation. Without an accurate determination ofvalue, lenders cannot assess howmuch coverage exists to protecttheir investments.
The pandemic and its ensuinguncertainty have put that age-oldinstinct of preservation of capitalto the test.
Prudent private lenders aren’t
standing by to see what happens.
They are adjusting their valuation
methodologies and underwriting
standards to ensure that there is
ample equity coverage to account
for the new economic, political
and societal stresses on property
These risk-based adjust-
ments include, singularly or in
• A blanket 20% discount on pre-
COVID- 19 values as a basis for
• Increasing underwriting as-
sumptions, including vacancy
rates and expense ratios; and
• Making cap rate adjustments.
How long these pandemic-in-duced changes to underwritingpractices and lending guidelineswill continue remains to be seen.
The Private Money AdvantageUnlike traditional lenders that arehampered by the burdens of federal regulations, private lendersare nimble and can pivot to meeta range of market demands andunique circumstances.
Whether a borrower is seekingspeed of execution, a short-termbridge to traditional financing,creative loan terms or a solutionfor personal hurdles, such as foreign national status, limited liquidity, bankruptcy or a low credit score, private money always hasserved, and will continue to meet,specific needs in the market.
During COVID- 19 and the ensuing period of economic recovery, private lending for the commercial real estate market willcontinue to further solidify its position in the capital markets as anirreplaceable, solutions-focusedfinancing strategy.
With the inertia-busting agility of private debt, along withthe guidance of experienced,trusted mortgage brokers andadvisors, commercial real estate investors and developerscan continue to move forwardand thrive, even in the midst ofa global pandemic. n
Y Lenders and mortgage brokers are debatinghow they can keep transactions movingforward during the pandemic.
Y Private money lenders are experiencinga resurgence in demand while traditionallenders assess the lending landscape.
Y Private lending for commercial loans hassolidified its position in the marketplace.
PrivateCONT. FROM PAGE 1
‘At the same time,many lenders haveput deals on hold,grinding to a haltpromising transactionsin a not-that-long-agoflourishing landscape.’