Lev Lending Prepares for “Thousands of Unique Scenarios” in Deals

It’s looking increasingly likely that the Federal Reserve will begin increasing the federal funds rate target next month, possibly as much as half a point. That much isn’t news: “the market has already priced in this increase, which can be seen by the 2-year Treasury increasing a relative ~124% vs. the ~33% relative increase for the 10-year,” Lev Lending general manager Pete Loukas tells Connect CRE. 

More to the point, says Loukas, is who will be impacted by the increases, and who won’t be. “Short-term, floating-rate borrowers (like developers and value-add investors) will feel a larger impact from rate increases than stabilized property investors that borrow long-term fixed-rate debt,” he says. 

Banks and debt funds are the more common sources of short-term debt, “which may look less attractive to many borrowers as rates increase,” says Loukas. At the same time, insurance companies, CMBS lenders, and the GSEs all should remain competitive on acquisition and take-out financing. 

Lev Lending’s current lending program is focused on the longer-term borrower, “which will now see pricing back to the norm,” that is, in line with pre-pandemic levels. Between the 2008 recession and the more recent pandemic recession, he points out, “there were only three sustained periods of time when the 10-year was held under 2.00%. In other words, the 10-year below 2.00% over the past two years since the pandemic began is extremely abnormal, and going back above 2.00% is just getting back to the way things almost always were prior to the pandemic.” 

In contrast to other debt sources, Lev Lending doesn’t contribute loans to conduit deals. Instead, the firm will underwrite, price, and structure to balance sheet execution, whether it’s the balance sheet of a whole loan investor or Lev’s own balance sheet in which it would hold the first-loss risk from a private asset securitization. 

The firm doesn’t take a one-size fits-all approach, especially since two of its primary customer bases bring very different concerns to the table. High-net-worth borrowers are primarily concerned with speed to meet 1031 exchange timelines, “while our institutional clients are most concerned with flexibility, given the rigid underwriting and structuring framework used by CMBS lenders,” says Loukas.  

He continues, “We launched this business to specifically address these problems, and – believe it or not – it’s working. We have a highly systematic process and set of procedures designed to address thousands of unique scenarios that we expect could arise for any given deal that comes through our pipeline. Our playbook and technology allow us to move very quickly to accurately track and address these issues, while affording the borrower maximum flexibility and customization to meet their particular needs. We want to solve problems, not create new ones.” 

In the current environment as in the past, the Lev Lending team has come to realize that “the best options are often not available at all to many borrowers,” Loukas says. “Where that is the case, it’s our job to create the solution where it doesn’t exist (e.g. non-recourse financing for small-balance net lease investments) or improve on historically inefficient solutions (e.g. our yet-to-be-released permanent loan program for small balance multifamily investments that don’t meet agency or CMBS lending criteria).” 

More broadly, the “best” option for a borrower depends on what they’re solving for, says Loukas. “If they need speed and a short-term bridge option, then debt funds can be a great option. If they are refinancing a loan and solving for the lowest rate, then they may want to pursue financing from a lender like Lev Lending or an insurance company. If seeking a high cash-out refi with an interest-only period, Lev Lending may stand alone as the best option.  

“For borrowers that need advice in determining what they should solve for, hiring a debt broker is generally the best path to success, and Lev Lending therefore always protects all broker relationships that send us deals.”