Q&A: Lending Environment for Mid-Sized, Smaller Deals

San Mateo, CA-based Redwood Mortgage recently closed a $10.9 million cash-out refinance in an urban area within the San Francisco Bay Area. The transaction presented special needs that would be big hurdles for most lenders. In our latest 3 CRE Q&A, Connect Media talked with Redwood’s principals Lori Randich (VP originations), and Steve Belleville, (VP sales), about today’s tight commercial lending market for mid-sized and smaller deals that make up the bulk of loan transactions fueling the industry.

Q: What was the $10.9 million loan’s back-story?  

A, LR: This was a first mortgage refinance on a retail and office property in a vibrant urban location experiencing growth. The cash-out refi paid off approx. $8.1 milion in debt, and will help re-entitle the property for another use, and eventual sale. We wrote a 24-month loan to provide ample time for the approval process.

The borrower had a lower interest rate mortgage in place with a low-six figure prepayment penalty, and their bank would not advance the additional funds that were needed. And they wouldn’t allow junior financing behind them. The borrowers had to come to terms with replacing a lower interest rate with a higher one, plus the sting of the prepayment penalty. But to move the development forward, they needed the funds for entitlements. And based on our longstanding relationship with the borrower, we sweetened the deal on the interest rate and points.

Q: What complexities are reflected in this transaction? How do mid-to-small private loans (under $20M) differ from others?

A, LR: For Redwood, this loan on an income-producing property with good cash flow is a fairly straightforward transaction. What was unusual was the loan size and the significant amount of cash out we allowed in the transaction – very few private lenders can fund a loan of this size. People often think private money is only for distressed situations – borrower credit or income flaws, or issues with the property. This can be the case. But more and more people are using private money to take advantage of an opportunity. Or for the speed and ease of execution.

Q: How are deals like this getting done, on transactions that share similarities of this mid-to-smaller transaction category? What changes are ahead, in this sector?

SB: Private-money bridge loans are meeting a need here. Borrowers report that it’s incredibly difficult getting a competitive loan in the mid-size or smaller categories, whether to renovate a property, refinance from a CMBS loan coming due, or other situations that require flexible, customized debt. One tool we rolled out is a Middle-Market Bridge loan program, which resonates with borrowers who need tailored loans.

Many long-term property owners face the challenge of how to access the capital or equity in their performing properties. Private money loan solutions provide an opportunity for many property owners to obtain the capital they need, with loan programs that offer some flexibility and competitive terms.

For comments, questions or concerns, please contact Dennis Kaiser