- Posted August 4, 2014 by
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Real Estate Investor James Peacock Sees More Nonbank Lending for Commercial Properties
Even though the economy and real estate markets have been making a comeback since the recession, banks continue to often balk at offering large mortgages for commercial real estate funding. According to the Federal Deposit Insurance Corporation, banks held only $210 billion in commercial real estate funding at the end of 2013 when compared to $631 billion in 2008.
Real estate investor James Peacock, of Peacock Real Estate Acquisition Partners LLC in Philadelphia, states “You’ve got to think outside the box now to do financing, and it requires creativity.” The lower appetite for commercial real estate risk is reflective of a post-crash regulatory environment, and banks must now increase their capital reserves.
Investors who seek commercial real estate funding are now turning to nontraditional lenders like mortgage real estate investment trusts and private equity-style debt funds for funding. The Wall Street Journal, in an April 30, 2014 article by Eliot Brown, reports that when Los Angeles developer Jeff Worthe sought financing to purchase a 32-story office building, the banks turned him down. Worthe was able to attain an $85 million loan for the $109 million building from publicly traded lender Starwood Property Trust. This company is part of a group of investors who are seeking to fill the void left by banks. It provides mortgages on riskier commercial investments, such as high-vacancy buildings, malls and skyscraper construction. Currently, Starwood is financing construction of three skyscrapers in New York.
The pros of attaining non-bank commercial real estate funding include no set lending requirements, a simplified loan qualification process and securing the funding quickly. On the flip side these loans typically come with a higher interest rate, are short term, require a realistic exit strategy and must have a realistic income potential. In addition, borrowers may need to cross-collateralize in order to gain full financing.
If the borrower defaults, nontraditional lenders can exercise their remedies and take control of the property. It’s game over for the investor. Often, these types of lenders have the development expertise to add capital and make the commercial property successful.
Industry leader Richard Hinton of KPMG states that “We are entering a new era of opportunity for alternative funding for commercial real estate with non-bank lenders.” It’s not so much a revolution as it is an evolution. For success, the business model must be clear and funding must be shaped to meet the needs of investors, regulators and markets. These are just a few of the critical success factors for new nontraditional lenders who are entering the changing world of primary lending.
According to industry expert James Peacock, "In order to keep ahead of what's going on, companies need to have a systematic process of innovation." Without a doubt, there is a significant market for non-bank lenders. While some are optimistic about it, there are others who are concerned that this new market of non-bank lending may lead to another credit bubble. Only time will tell.