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Alternative Lenders – Increasing Competition on the Commercial Real Estate Playing Field

August 12, 2016 | Jonathan Pryer

“Olympics — A lifetime of training for just ten seconds.” — Jesse Owens, American track and field athlete and 1936 four time gold medalist.

The Olympics in Brazil have recently kicked off and competitors from around the world are competing daily against each other on the Olympic playing field.  Some athletes are familiar, many famous, some even world record holders. But as it is every four years, new players enter the Olympic Games, broadening out the playing field and adding a bit of the unexpected to the competitive landscape.

“If you fail to prepare, you’re prepared to fail.” — Mark Spitz, American swimmer and 1972 seven-time gold medalist.

In the case of the Commercial Real Estate (CRE) market in North America, regulatory initiatives are certainly providing “a bit of the unexpected”.  Traditionally, the majority of CRE debt providers have been commercial banks.  These lenders (and by default the associated CRE developers requesting the financing) are now facing a new series of revised regulatory rules to navigate.  In December the Federal Reserve issued the Statement on Prudent Risk Management for Commercial Real Estate Lending which focused on CRE loan underwriting standards.  Basle III and Dodd-Frank rules related to lending and capital requirement (high volume commercial real estate) are also being implemented over the coming year.  As a result, many institutions are preparing themselves for potential changes in strategy including a shoring up of their underlying technology to ensure complete transparency and compliancy.

“You’ve got to look for tough competition. You’ve got to want to beat the best.” — Grete Waitz, Norwegian runner and 1984 silver medalist.

As we see new Olympians competing in Rio, a similar trend seems to be playing out in the lending arena.  The recently revised regulatory rules have opened up the door to increased competitors in the form of alternative lenders.  Non-regulated specialty CRE lenders who are immune to the revised rules are not “feeling the burn” of limitations on CRE exposure and are carving out a unique and innovative space in the market. Alternative lenders range from all types of money managers such as asset managers to insurance companies to marketplace (or peer-to-peer) lending to crowd funding.  When evaluating the non-bank playing field, there are many different lenders to choose from providing varying degrees of underwriting flexibility and funding options.  Alternative lenders are of course subject to guidelines but generally speaking are able to make more acceptations to the rules than traditional lenders.  Alternative lenders dealing in asset based lending for example may be more flexible in regards to credit approvals.  Where traditional lenders may be solely focused on property or projects located in gateway cities or metropolitan hubs, an alternative lender may be the answer for other property locations.

 “Great moments are born from great opportunity” – Herb Brooks, coach of the 1980 gold medal US ice hockey team.

Those commercial banks and alternative lenders that are already collaborating (or looking to collaborate) in this competitive climate may prove that there really is no “I” in “team”.  Banks still fund alternative lenders.  And alternative lenders are filling gaps in providing alternative or more bespoke sources of debt and equity such as bridge, mezzanine, construction financing, etc. enabling borrowers that may not fit the criteria required by a bank.  In doing so, alternative investors are helping grow new CRE development projects and bigger businesses that may eventually partner with commercial banks for different instruments, higher volumes and services.  Borrowers today therefore have more options of who partner with including alternative lenders, traditional lenders or collaboration of the two.  Loan terms and time to close may be more of a 100 meter sprint when dealing with an alternative lender but rates and fees may stack up to be more of a perfect “10” score when dealing with a traditional lender, either way a qualified borrower can successfully cross the proverbial finish line.

“He who is not courageous enough to take risks will accomplish nothing in life.”
Muhammad Ali, gold medalist in boxing in 1960

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