Financing Strategies for Assets in Transition
- Nov 30, 2018
With high property values and rising rental rates, commercial real estate remained an attractive investment in 2018 despite some uncertainty caused by stock market volatility, the current political climate and increasing interest rates.
In light of high competition for well-positioned properties and scarce ground-up development opportunities, many investors are becoming more creative in their acquisition and ownership strategies in order to reap the benefits of strong market fundamentals.
These strategies increasingly include adapting and repurposing properties for other uses that are determined based on the bones of a structure, submarket demands and existing zoning or rezoning possibilities.
There is capital available for well-located assets in transition, which can offer highly lucrative investment opportunities that otherwise would not have been available.
That said, transitional properties are often vacant or not generating near the cash flow they will once complete. Thus, securing financing for these transitioning assets requires careful strategy to overcome lender hesitancy. The following are our recommendations for approaching capital providers.
Face Lender Hesitancy Head-On
Due to strong market fundamentals, there are ample sources of capital available to borrowers. As the cycle lengthens, however, lenders will increasingly scrutinize opportunities and will only provide competitive financing if they are confident in a sponsor’s business plan.
One of the main concerns for lenders when presented with a property in transition is the lack of current cash flow and the inability to predict a stable future for the asset.
In order to secure competitive financing, borrowers must ensure that lenders have a deep understanding of their track record and business plans.
For example, we recently worked with a borrower who had repositioned a Southern California property into a modern mixed-use space after a long-term biotech tenant exited. We were tasked with securing a competitive loan quickly in order to lock in a low interest rate despite the fact that the property was vacant.
We strategically demonstrated the multiple uses that the asset could accommodate and its prime location near a growing master planned community in order to illustrate future tenant appeal, and we presented letters of intent from potential tenants to further alleviate hesitancy. Ultimately, we were able to source a five-year loan sized at 70 percent of the current value of the property.
Present a Holistic View of the Asset
In today’s market, it is not unusual for a potential financing opportunity to be presented to several lenders before identifying one who understands the holistic value of an asset and believes in the borrower’s business plan.
Especially for properties in transition, demonstrating the asset’s strong appeal to investors, tenants and owner-users is key.
An experienced and strategic financing partner can help borrowers to identify and properly highlight the most beneficial aspects of an asset to achieve the greatest leverage.
In addition to highlighting the current state of the asset and planned renovations, the holistic appeal of a property can include possible future development based on zoning or re-zoning potential.
It is also important to present a comprehensive view of the submarket and how the property fits into it, including existing and future demand drivers for growing or revitalizing areas.
Borrowers can greatly benefit from partnering with an experienced financing professional with deep lender relationships and extensive experience in the specific submarket that a subject asset is located or one with similar fundamentals.
Be Open to Short-Term Loans
While some sponsors may shy away from pursuing bridge loans and other short-term financing due to perceived high costs of capital, these structures can be beneficial when pursuing value-add opportunities or deciding next steps for an asset in transition.
With leverage lowering across the board, strategic borrowers and finance experts are increasingly recognizing that a temporary loan can help to achieve ownership goals and is well worth the slightly higher rate.
For instance, we recently secured financing for a well-located mixed-use asset in the revitalized San Francisco neighborhood of Hayes Valley. The then-vacant building had previously been used as an office and was zoned for possible development, including retail and multifamily.
The borrower was an owner-user who had recently retired and was facing a maturity default due to a sale that fell through. Given the unexpected situation, she reevaluated her options and was planning to re-tenant the building and potentially secure a Small Business Administration (SBA) loan before pursuing a sale.
By demonstrating the potential of the asset and the business plan, we were able to quickly secure a non-recourse bridge loan that fit the borrower’s requirements and funded her expenses in the meantime.
Overall, there continues to be capital available for borrowers at all stages of the process of repositioning a property. Borrowers can secure competitive financing by transparently alleviating lender concerns, highlighting the long-term appeal of the asset and being open to short-term financing options in some cases.
Mitch Paskover is the president of Continental Partners, a national mortgage banking firm that provides capital and financial services to real estate owners and developers nationwide.