May 24, 2018
By Dennis Kaiser
Connect Bay Area pointed a spotlight on one of the nation’s most complex and active markets. Our annual conference, held on May 17th, 2018 at Galvanize in San Francisco, drew an audience of more than 250 commercial real estate professionals to hear an investment overview, a presentation from BART, and three deep-dive panels.
A panel titled “What It Takes to Get a Deal Done Today” was moderated by George Smith Partners’ Malcolm Davies, and included Columbia Pacific Advisors’ Billy Meyer, Banc of California’s Bryan Harvey and Bridge Bank’s Elizabeth A. Swift.
This group of experts from across the capital stack discussed the drivers, obstacles, and financing programs borrowers want and investors need to get deals done. They examined what’s succeeding, what’s changing, and what the financiers see in the year ahead for the Bay Area markets.
What Columbia Pacific’s Meyer said the private money lender looks for when doing deals is ascertaining a “quick, clear path” to getting their money back if the deal goes sideways. “The exit must be very clear, and the borrower must have the wherewithal to weather a storm,” he said.
But, defining the clear path exit is “hard to define” and there’s no “carte blanche” approach, notes Meyer, since every market is different and virtually all product types are different. He says, if a shift occurs, they will want to be comfortable with the sponsor, operator, as well as a whole host of considerations.
As a private money lender with higher interest rates, Columbia Pacific can quickly get comfortable with deals others won’t pursue, typically producing a turn sheet in a day, take a week to underwrite and close in 30 days. Meyer says they are a good fit for short-term borrowers that need speed and the confidence of a quick closing, because they offer flexibility, which can be valuable when deals are not quite yet “bankable,” and may need some “seasoning,” he says.
Bridge Bank’s Swift notes, as a banker she tries to “be a pessimist and look at the downside or what the worst case scenario is on a project,” since she handles everything from underwriting to relationship manager on the deals the bank does. While she generally takes longer than five minutes to size up deals, Swift says she applies four tests to determine if she’ll pursue a deal or not. They include: 1) minimum debt yield 2) minimum debt coverage 3) maximum loan to cost and 4) maximum loan to value. She indicates that’s “because I’m sizing to the take-out market.”
As far as the net worth and liquidity requirements Bridge seeks, Swift says, “liquidity is king.” She notes people can talk net worth and cap rates all day long, but having “money in the bank is key,” with a benchmark 10% in a bank that gets tested quarterly.
Banc of California’s Harvey says the Bay Area is the best real estate market in the country for a plethora of reasons. But the fundamental element he looks for is “good real estate behind the debt.” He points out that the biggest challenge he faces is competition on acquisitions as the rates slide up. As they’ve gone up, proceeds have gone down. Since they were based on low Treasury rates, as qualifying rates have gone up the bank has had to become more “aggressive” in order to win deals. He says the downward pressure on spreads has lend to them offering bridge loans or interest-only options, to compete in today’s lending environment.
Swift notes they are seeing spread compression that’s settled at a “pretty standard” level, between 300 and 350 over one month LIBOR. She notes they’ve seen some go down as low as 250, for borrowers with “tons of money in the bank.”
But for Columbia Pacific’s Meyer, since their private, short-term bridge money is in the 10-11% rate level, the common borrower request is for interest-only, which works for them since they will let borrowers dictate how long they want it. The key for this lending segment is borrowers are seeking to quickly unlock capital, even at a higher rate, in order to get a project started, complete the work and then go back out and refinance it as quickly as possible.
One of the interesting comments shared by several panelists was about relationship building, with face-time needed between the credit officer and a developer. Swift says, when that happens it makes a difference” in making a loan.
In terms of favorite asset classes, panelists noted the Bay Area’s booming economy has pushed just about every product category into the “good deal” bucket. Meyer advises not to invest in “anything that you don’t understand,” though.
While Swift notes, “if there’s a bad word or phrase at the bank now it is big box retail.” She points out that is easy to advocate for grocery-anchored shopping center deals, though she’s not completely certain of the longevity of that category, given so many people now order food delivered. Other categories she looks at are self-storage, hotels and seniors housing, especially with a sophisticated operator involved.
Meyer notes the concern with seniors housing is that while demand is high, to be successful in this product type it requires knowledge of the submarket. It also necessitates a keen understanding of the need and demand for the specific level of care, whether that be assisted living, memory care, etc.
For comments, questions or concerns, please contact Dennis Kaiser