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How Private Lenders Stepped In Where Banks Fear to Tread
Given the many factors roiling the economy and our industry, this has been a productive time for private lenders, who have stepped up to provide many of the loans that banks have sought to avoid. Partner Insights spoke with Don Braun, president of HALL Structured Finance, a direct private lender, to learn about how troubled times have brought opportunity to HALL and other private lenders.
Commercial Observer: Many in commercial real estate believe there is no money available from lenders for ground-up hotel and multifamily projects, but you say this is a misconception. Why?
Don Braun: Certainly there is less debt capital available for real estate today than in the recent years, but to say there’s no debt capital, that’s just a bridge too far. We are aggressively seeking to provide debt capital for the right projects, with a focus on the multifamily and hotel sectors and a further focus on new construction and recently completed projects.
Why do you think that misconception has taken hold, then?
Why are you able to provide this financing when many banks cannot?
Many community and regional banks are simply constrained from a regulatory capitalization and real estate allocation standpoint. Existing loans are not running off their balance sheets at the same level as in prior years. Typically, higher loan payoff levels create the room and need for banks to originate new loans. We are just not seeing that same runoff because, in many situations, borrowers are looking to their existing lenders to extend existing debts, rather than refinance them. Private lenders do not operate with the same constraints as regulated institutions.
Does HALL Structured Finance have more or less funding available now than it has in recent years?
We have capital available and are looking to expand our balance sheet. We think the current environment presents a great opportunity to grow our real estate loan portfolio. Last year, we did just over $700 million of new loan originations. We have capital available and are looking to expand our balance sheet given we think the current environment presents a great opportunity to grow our portfolio.
What kind of financial solutions does HALL Structured Finance have for developers?
Our primary focus is on the multifamily and hotel sectors. We also prefer – and specialize in – construction financing, though we will provide bridge financing on a selective basis for existing projects.
We think providing construction financing in the current environment presents a great opportunity, both for our prospective borrowers and for us.
For developers, we believe that new projects starting today, and completed in one to two years, will be delivered into a strong environment where there will be less competition from other new projects as the pipeline of nearly all real estate products has slowed. And while the future is never certain, we believe the economy is poised to continue to grow, and we will likely be in a lower interest rate environment in two years than we are today. These are key considerations that can offset the impact of higher construction financing costs, creating long term value for new projects.
For the right projects, we have also been combining our first mortgage construction loans with C-PACE financing which can be very beneficial to developers in providing a far more cost-efficient capital structure. While this does not work for all projects, in cases where it does, it really can provide a host of benefits to our borrowers.
Do you find that C-PACE is a somewhat exclusive offering, or is this becoming more widely available?
C-PACE financing is certainly a growing area in the financing world, though it continues to be used selectively. The key is to find a financing partner who is familiar with C-PACE and knows how to incorporate it into the capital stack to create efficiency. I think it is harder to place C-PACE financing when the remainder of the debt is being provided by a bank or other institutional capital sources, so that presents an opportunity for us as a private lender.
In addition to the C-PACE opportunities, what are some other advantages to borrowers of doing business with private lenders as opposed to working with the institutional capital providers?
Private lenders can be more flexible in structuring a loan, taking into consideration the individual characteristics and needs of the project and borrower. We can underwrite various types of borrowers in terms of size and financial capabilities, and importantly in today’s world, we don’t have new loan deposit requirements which is the case with many banks.
Who is HALL Structured Finance’s typical borrower?
Our borrowers cover a wide spectrum, from larger institutional companies to more entrepreneurial borrowers and developers. In fact, we embrace the entrepreneurial spirit that real estate development requires. Our parent company, HALL Group, is a real estate development company that has been in business for 56 years and we truly understand and appreciate what it takes to bring all the pieces and people together when starting a new development.
What does all of this mean for HALL Structured Finance in 2024 and beyond?
We hope that 2024 will be a very active year on the new loan origination front. With our unique focus on construction financing, we believe there is a lot of opportunity out there to partner with experienced owners and developers on great projects.
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