FundingWhere do we find the funding you need?
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Domestic Banks remain the largest funding source for CRE with $ 1.4 trillion outstanding although losing market share by billions of dollars annually. In the beginning Banks were the most efficient intermediaries. They matched the majority of those with surplus funds with those needing to borrow funds, determined risk and then competitively priced the best rate spread. But the domestic bank intermediary market has been declining for over 100 years. Post the Great Recession of 2007 bank regulators issued Interagency Policy changes for Asset Concentrations and Risk management. The changed policy was directed at significantly reducing lending in various types of Commercial Real Estate. Now with new regulatory CRE asset concentration limits, regulators increased capital requirements, tied risk tolerance to allocated capital and required management to project extreme market conditions to determine capital adequacy. The new regulations have caused less commercial real estate lending, less rate risk taking causing greater emphasis on non-interest income based products.
Historically banks made money on the spread of lending longer than the committed funding source, took interest rate risk and made an interest spread premium. However current Federal Reserve Policy is intentionally flattening the interest rate curve by purchasing public debt and expanding its balance sheet thus causing reduced bank interest rate spread income.
Concurrent to changing bank regulation and changing Federal Reserve Policy new Dodd-Frank legislation increased compliance costs with the drafting of hundreds of new regulations and hundreds yet to be written. This caused banks to reduce CRE production staffing consistent with reduced lending and redirect staff to increase required servicing for regulatory monitoring.
Now lenders and borrowers need introductions. Lenders are selective by type, location and various underwriting characteristics. Wheeler Capital Partners can locate a bank that is interested in your project; prepare informative presentations and factual market analysis to allow the bank to properly assess risk.
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CMBS markets are the fourth largest provider of funds to the commercial real estate market with $481 billion in loans outstanding. Annual new issuance reached a high of $228 billion in 2007 but adjusted quickly to the Great Financial Crisis of 2007 dropping to $2 billion in 2009.
The resulting delinquency and losses from the recession caused a retooling of the market acceptance of this funding. CMBS 2.0 issuance as it is referred to since the Great Financial Crisis exhibits conservative underwriting with increased debt service coverage ratios, lower loan to value ratios and minimum debt yield ratios. Initially 2.0 offerings were private transactions via Rule 144A but with greater transparency, increased loan level disclosures and lower % of pool with subordinate debt publicly registered securities returned in 2011. Issuance grew from 2009 reaching in excess of $96.7 billion in 2019 topping 2018’s volume by 27.1% and the heaviest issuance since the Great Financial Crisis, according to Trepp. The fourth quarter alone posted $38.5 billion of issuance, or 40% of the year’s total.
Risk retention became required by Dodd Frank on 12/24/16. Now a 5% retained piece of each transaction favors bank issuance or an issuer must issue a high premium B-piece in the horizontal strips. This caused volume to never return to pre Dodd Frank retention requirement. 2019 issuance volume in the 4th quarter was driven by a one-time GSE event.
Wheeler Capital Partners has credibility with issuers and presentations are complete and easily underwritten for rapid deal response. The current uncertainty requires a knowledgeable presenter with known to the lenders to assure commitment and closing. We closely monitor from application to closing all details to insure funding consistent with commitment.
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Mezzanine capital is a subordinated debt or preferred equity investment. In 2019 real estate debt funds reached a final close, raising globally a total of $61 billion. It is forecasted in 2020 debt funding will raise $72 billion largely in distressed debt funding. This funding will be added to the currently $68 billon in unfunded dry powder. These capital reserves are due to be deployed in the coming months given the significant defaulting likely in the aftermath of the COVID-19 crisis. Debt Funds can provide Bridge financing, Construction and Property rehab financing.
Wheeler Capital Partners can arrange mezzanine financing and has investors who are willing to consider note purchases and private financing on smaller size transactions. Matching borrowers’ needs and these sources can be structured providing or supplementing other financing.
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Life / Property Casualty Insurance Companies continue to grow slowly and selectively with $572 billion in loans outstanding or 15% of total CRE loans outstanding. They are the most conservative funding sources offering financing to high-quality borrowers owning the best projects with loan to values rarely exceeding 60% and the lowest rates in the market with the exception of agencies. As they improve credit quality they also increased average mortgage sizes from $15.5 million to $20.5 million to lower transaction costs as margins tighten. Each insurance company has industry sector type limits, loan size limits, demographic restrictions and stringent underwriting assumptions. However we have found smaller insurance companies with more flexible term, rates and loan size. Many change desired characteristics during the year and ongoing contact is needed to match changing needs.
Wheeler Capital Partners understands borrower needs and match your needs to changing insurance company requirements. We as a third party mitigate underwriting requirements with effective presentations and offering creative solutions for all parties.