Foreign-investor debt strategies are typically a mixed bag that include higher-yield mezzanine and
bridge-loan funds, as well as more conservative senior loans. In the rising interest rate environment,
some see debt strategies as less risky, since their investors are less vulnerable to major losses than equity
investors if a property’s value falls.
Borrowers and brokers must consider, however, that debt funds ultimately operate through the
deployment of capital to their investors when they make a loan. This means that even if a debt fund’s
investment is not lucrative, the fund managers still make money through a management fee. Fund
managers wishing to deploy abundant dry powder also may be less meticulous in terms of the investments they make.
A number of nonbank lenders offer balance-sheet financing options, which are proprietary lending
products structured by in-house experts. These companies assume the most risk when they issue loans
because they use their own money to provide the financing. Because these nonbank lenders have more
skin in the game, they are less likely to offer flexible and aggressive terms, and more likely to be cautious
regarding the properties they are willing to finance.
Nonbank lenders, however, still provide numerous bridge- and mezzanine-loan programs that will
allow a borrower to eventually transition to a more permanent financing structure. These lenders are
among the most incentivized to perform well because of the losses they will incur if they don’t.
There are three financing factors that a mortgage broker should consider when assessing a lender’s
capabilities: leverage, credit and loan structure. Failing to consider leverage and credit, in particular,
could lead a client to lose a great deal of his or her own capital, and thus lose faith in the mortgage broker.
Leverage. Responsible lenders will take care to ensure they do not overleverage their loans. Although
most property owners use some leverage, those who are reckless borrow more money than they will be
able to pay back if they do not receive the expected return from the property’s income. Overleveraging
can happen if a lender fails to accurately assess risk or shows a lack of regard for the risk they are undertaking. For borrowers, improper use of leverage can cause them to be unable to obtain future refinancing
on the same property.
Credit. When lenders assess financing opportunities, they should take care to ensure the assets they
are underwriting are creditworthy. While some lenders may be willing to provide a loan on a subpar
property, other lenders will make sure the loan terms match the quality and price of the property.
Although a borrower may be tempted to accept financing on such a property, the asset may ultimately
be worth less than the loan that was issued. In such cases, the borrower may lose the asset or, in order to
keep it, may be forced to pay more than the property is worth.
Loan structure. Borrowers and brokers should be wary of financing structures that do not protect the
borrower if the property’s value drops. Although a loan structure generally exists to protect a lender,
diligently structured loan terms also can encourage a borrower to remain vigilant regarding the basis
and economic performance of an asset. Ultimately, an engaged borrower will better maintain and
manage an asset, preserving its value and maximizing its cash flow.
n n n
As inexpensive capital continues to proliferate, some undisciplined lenders may be engaged in a race
to the bottom. The fallout of this practice may eventually affect a mortgage broker’s clients. In the interest
of maintaining strong, long-term relationships with borrowers, brokers should carefully recommend
financing options that not only work in the moment, but over the long term. n
Justin Short is managing director of proprietary lending for Hunt Mortgage Group. Based in Dallas,
he is a seasoned real estate professional with buying and selling experience across the commercial
mortgage-backed securities, real estate credit, capital-market and trading spectrums. He has directed
commercial real estate debt acquisitions, trading and securitization, and has been involved throughout
the product cycle with loan origination, pricing and hedging, portfolio and asset management, syndication and
distribution. Reach Short at email@example.com.
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of leverage can
cause them to
be unable to
on the same