The loan market remains active | Los Angeles Business Journal
Photo by Hunter Kerhart
Economic uncertainty is changing lending practices, but that doesn’t mean there is no financing available for commercial real estate in Los Angeles.
The trick, however, is to find that financing and get it on the right terms.
“Everything the underwriting people used in January and February has clearly changed now,” said Kevin Shannon, co-head of capital markets at Newmark Knight Frank. “The terms of the loan – they’re getting so drastically different from what they used to be.”
While some lenders are “afraid to make bad loans,” Shannon added, availability has improved because interest rates are still low at the federal level and small regional banks are still lending.
“This is an opportunity for us to come out in front of new clients,” said Hamid Hussain, president of real estate and commercial banking at Banc of California.
“We are in a strong position with our portfolio,” he said. “We proactively reach out (about loans) with people who may or may not be existing customers.”
Some companies are even creating new ways of providing loans.
Brentwood-based Archway Fund and executives of Oakhurst Advisors of West Los Angeles recapitalized the fund to create Archway Capital, which will provide fixed-rate short-term debt of between $ 2 million and $ 20 million in the form interest-only loans.
Bobby Khorshidi, chairman and chief executive of Archway Capital, said the company has been under discussion for some time.
Archway and Oakhurst, he said, understood that a recession was approaching and “wanted to position the company so that it was no longer dependent on original loans” for individuals and instead controlled the capital.
The group is now lending to portfolios. “The time has come to coincide with Covid,” he said.
But that doesn’t mean Covid-19 hasn’t had any impact on the group’s lending practices.
Khorshidi said the company was more cautious when lending on purchases made before Covid-19 because the market had changed, but less conservative in lending with purchases made after recent market adjustments.
The company, he added, is particularly interested in industrial properties and value-added acquisitions.
Many lenders are still open for business – if the deal is right.
“Some segments of the loan market are either closed, on hiatus or limited,” said Shlomi Ronen, managing director and founder of Dekel Capital. “Others are always trying to be active. Real estate transactions have come to a halt, which has reduced the demand side of the equation. ”
Previously, banks financed 60% to 70% of acquisitions, he said, but now the leverage is between 50% and 60%.
Ronen added that lenders don’t want to finance hotels or commercial properties, preferring industrial assets instead.
Jonathan David Hakakha of Beverly Hills-based capital advisory firm Quantum Capital Partners Inc., said despite market challenges, the company has had a busy year.
In fact, Quantum Capital has closed more deals than ever at this point in the year.
“There has been restructuring for the most part,” Hakakha said.
Lenders, he added, now want to see a “debt service reserve” – money set aside for the next six months to a year.
Hakakha said that because lenders are more conservative and raise their prices, borrowers have an interest in waiting for loans if they can.
Many developers are trying to wait until the end and “see if they can get more leverage in a month or two,” Ronen said.
But some changes may persist.
“Once the loans reopen, lenders will be more conservative and maintain higher rates than they were before the crown,” Hakakha said.
Calabasas-based MREC Management, better known as Mosaic Real Estate Investors, is being more careful with its money while still making loans.
Vicky Schiff, co-founder and managing partner of the company, said “the strong will survive” Covid-19.
In deciding what loans to make, Schiff said the company, which provided $ 2.4 billion in loans, is looking at the potential drawbacks.
Industrial and multi-family, she says, are in the best shape.
Over 50% of Mosaic loans are for construction. Schiff said new construction loans are given “in a very, very selective manner,” with an emphasis on multi-family and high occupancy markets.
The terms of the loans are very different from what they were before Covid, she said.
“We were selective before, but we really slowed the pace and mainly focused on multi-family,” said Schiff.
She added that Mosaic receives inquiries from new and loyal customers.
“We are interested in providing capital to strong operators, and it could be capital that they might not be able to get from traditional lenders, perhaps because their traditional lenders have stepped back,” he said. she declared.
Schiff also said there has been an increase in the flow of transactions since the arrival of Covid-19.
For banks, CRE’s financing approach is now very variable. Some banks that focus on lending portfolios in more stable areas, such as residential, can afford to continue lending.
“We have tightened our underwriting criteria, but are accepting new applications,” said Simone Lagomarsino, President and CEO of Luther Burbank Corp.
The head office of the bank of Luther Burbank is located in Gardena, although the head office of the bank is in Santa Rosa. About 96% of the company’s loans are in residential real estate, including multi-family, which Lagomarsino says gives her confidence in the stability of the portfolio.
“We entered this with a general housing shortage,” she said. “We’re going to come out with a housing shortage.”
Lagomarsino said Luther Burbank faces a problem common to any commercial real estate lender in today’s environment: abstentions.
Without money to pay their rent, many newly unemployed tenants have had to ask for payment deferrals. In multi-family, this affects lenders in the form of late mortgage payments.
Under normal circumstances, banks would generally be required to report these deferred loans as past due. This reporting becomes problematic for borrowers, whose credit is then generally damaged, as well as for banks, which can become targets for regulators after having accumulated too much problematic debt.
The Coronavirus Help, Relief, and Economic Security Act, or CARES, suspended this reporting requirement.
“This has been beneficial for the banks,” said Lagomarsino, who added that his bank had been active in issuing deferrals to borrowers who can demonstrate the economic hardship associated with Covid.
Deferred payments are added to the borrower’s principal, with a new rate based on earnings, according to the CEO of Luther Burbank.
Cool on Retail
Other banks offering a wider range of types of CRE loans face more complex situations.
About 44% of Chinatown-based Cathay General Bancorp’s total loan portfolio is made up of CRE. Of that amount, nearly a quarter is in retail real estate, while other problem areas like hotels and restaurants account for around 6.5% of the bank’s total commercial real estate loans.
Cathay’s COO Chang Liu said the low loan-to-value ratios of the bank’s commercial real estate portfolio – which averaged around 50% – made his company relatively confident in its stability.
Despite this, Cathay generally withdraws from new loans to new clients, according to Liu.
“We are focusing more on our current relationship,” he said. “For existing customers with this (established) experience, we are looking for new CRE transactions.”
The bank also seeks out its existing customers by contacting borrowers and inquiring about their business situation.
“We want to know how they are doing,” Liu said, “and how we can help them if they are having cash flow issues in the current environment.”
He said that one area where Cathay wanted to start new business was industrial property lending – especially related to e-commerce.
“It is not currently a big area for us now,” he said, “but we are looking to develop it.”
Banc of California, meanwhile, has generally taken a more optimistic stance on new loans, seeking to use the current situation to attract new customers.
Despite this, some areas will still be largely off-limits for the Santa Ana-based bank in the coming months.
“We’re not going to say blatantly no to retail and hospitality,” Hussain said, “but it will be more difficult to do these kinds of transactions because of the environment.”
About 14% of Banc of California’s approximately $ 2.3 billion CRE and multi-family portfolio is comprised of commercial properties.
Beyond the categories of problems, however, the bank is actively seeking to issue new loans to new customers.
Hussain said the relative shortage of commercial real estate financing could make people or businesses who had not previously worked with his institution more willing to try a new lending partner. His bank’s bet is that these borrowers will then form ongoing relationships long after the pandemic downturn is over.
“Real estate is a cyclical business,” added Hussain. “As a strong bank, these are the times when you gain market share.”
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