February 10, 2020
By Dennis Kaiser
There is a common misperception that all bridge lenders are the same, and this sector of the lending community is merely a commodity to be picked off an overcrowded shelf. Archway Fund President and Principal Bobby Khorshidi explains why the myth doesn’t hold up in today’s commercial real estate environment.
Q: Why do you think the misperception about bridge lenders has come up and why do you say bridge lenders can’t be commoditized?
A: Last week, I was brought along by one of our originators for a meeting with a prospective referral source who was relatively new in the debt space. He shared an opinion that “all bridge lenders are the same,” and because there are so many bridge lenders today offering similar products and rates, his opinion was “the bridge business has become very commoditized.” When asked if the same statement could be made about banks, the answer was “no,” though the reasons weren’t as easy to articulate.
After some thought, I realized the reason that the commoditized statement isn’t said about banks is because the barrier for entry for banks is much higher than the barrier for entry for bridge lenders. As yields have compressed, we have found many people who were traditionally real estate investors have now entered the bridge lending business. Today, that could encompass one with a couple million dollars in liquidity or a sizeable family office.
What both of these lender profiles have in common is that they are both in the bridge lending business because it is the more attractive place to be right now for their capital. It is a way to keep cash fairly liquid in anticipation of downturn in the market. These types of lenders are not in the business of lending, they are in the market to generate a return on their personal cash. The questions that remain are: How will they behave when the tides turn? Will they work with their borrowers if things go south? Was their motivation to enter the space a “loan to own” strategy, or a bid to push the buttons to collect default interest?
This low barrier to entry has led to so many new players in the business that it has created the illusion to borrowers and commercial debt brokers that the field is more crowded than it actually is. By asking the right questions, a borrower may find out that many of the bridge lenders in the market now are not who they represent they are. There are many loan submissions floating across desks that are essentially daisy chains. Later, it might be discovered that there are five brokers involved in a deal. This usually happens when someone represents themself as a direct lender, only to turn around and broker a loan. It is imperative for commercial debt brokers to vet out their lenders and know them.
Q: What sets some lenders apart from the plethora of bridge lenders that have entered the field in recent years?
A: Typically, a lender’s reputation in the marketplace will reveal where their allegiances lie. It is vital to know how they may behave if the tides turn, and if they will work with a borrower to ensure the business plan and loan obligations are met.
The loan production performance for loan originators will be a telling sign, too. You may discover such anomalies as the collection of astronomical rates and fees. Before getting too impressed, you might find out those were based on deal re-trades prior to close by claiming that the loan parameter changed thus the loan fees were increased 50-100% right before closing.
Q: It is easy to see why borrowers can get frustrated. What should a CRE borrower look for in a quality bridge lender?
A: There are a host of things smart borrowers know to look for. That may start with finding out if the loans originated are to be on the lender’s balance sheet, or if they are securitized and sold. That will help unearth a greater understanding of the lender’s motivations. If the borrower will have to deal with someone other than the original lender that underwrote the loan, it can cause issues, and it reveals who might be a true partner through the loan term and across market cycles. Establishing a relationship with a lender that you communicate with from origination to pay-off is imperative because a trust can form between the parties that allows them to work through any challenges that may arise.
It is also a savvy practice to know that your lender is financially solvent enough to meet its obligation to provide draws after the loan closes.
Another key to know is if they are a direct lender. The key elements that must be weighed are if they lend off their balance sheet, or out of pooled funds. It is a good idea to find out what drives their decision process, and who is on the loan committee. The lender’s track record of issuing term sheets and actually closing on those terms also reveals much about the quality of a bridge lender.
Clearly, the bridge world is actually more complex than many may think, and not all bridge lenders are created equal. Portfolio bridge lenders have become the modern day private bankers. I always tell our team that we are in the customer service business. If we are going to charge a little more than banks, we have to make up for it with great customer service, flexibility, speed, and certainty of execution. The right lenders can take you back to the days where you sat across from someone, looked them in the eye and got their word they’d perform.
For comments, questions or concerns, please contact Dennis Kaiser