How Developers Can Secure Loans in a Tight Lending Environment
- Apr 26, 2016
As we get into the later stages of the real estate cycle, the industry has seen a more cautious lending environment. While construction financing is still available, lenders are being more selective and underwriting real estate debt more conservatively. CPE sat down with Shlomi Ronen, founder & managing principal of real estate merchant bank Dekel Capital, at the 2016 ULI Spring Meeting to discuss how sponsors can secure loans in the tighter lending environment and how his company adjusts to the changing capital markets.
CPE: How did you get into the real estate industry and decide to form Dekel Capital?
I’ve been in real estate for 20 years now. I started out in construction after undergrad, working in construction management for five years, and then went back to school and got my MBA at the University of Southern California. I used that to transition over to the finance side of the business. In 2001, I got my first finance job, and I’ve been essentially in capital raising and, as of late, also in an investment capacity within commercial real estate. I formed Dekel Capital five years ago with the idea that we would create a boutique platform that would help developers and investors raise capital for their projects, as well as provide them with capital through our own proprietary funds.
CPE: How has your business expanded or evolved since its formation?
We actually launched our proprietary investment platform two years ago and to date have invested in nine projects totaling just over $90 million, specifically focused on ground-up multifamily residential real estate. We invest in market-rate multifamily projects as well as senior living, assisted living and memory care.
Before, we were pure advisory, helping raise capital. Traditionally, our focus has been on middle-market projects, which for us in California means deals with total capitalization between $20 million and $50 million.
Our equity plays in the $4 million to $10 million equity range, so if it’s not a market-rate multifamily or senior housing deal and it’s above $10 million, that tends to be larger than we can do and we’ll go out and raise that from a third-party source.
We currently have four people working at the company, and we’re growing slowly but surely.
CPE: In today’s lending environment, how do you think developers can stand out to secure loans for their projects?
We’ve seen in construction lending, from a credit standpoint, the amount of activity is starting to pull back, and from a balance sheet standpoint, if you’re a construction lender, you’ve lent quite heavily over the last 18 months so the balance sheet is getting constrained. The balance sheet is further constrained these days because of the new Dodd Frank and Basel III regulations that’ve come into play over the last 12 months. Those two factors have really limited the amount of money lenders are putting into new development deals.
What it’s come down to is relationship. Our role is to serve two purposes. One is leveraging our relationships with the lenders to get them to take a look at a project or a client and to bring them into the bank for a new development. We also have to know which lenders have capacity because it’s very much a fluid market, and as capacity opens up, lenders are looking to lend more. It’s really about being out there and talking to them to find out who has some capacity and try to create that match between the sponsor and the lender.
In terms of getting that capital, once we make that introduction, we make sure the sponsor has something to offer beyond just borrowing money. Lenders are looking and saying, “What other business can we do together? Can you bring your company business and bank with us?” If a sponsor has wealth management or other relationships that the bank will offer, the bank will oftentimes ask for that relationship to get expanded, as well. It’s not just transactional. It’s becoming less transactional on the construction side especially and becoming more relationship banking, which is historically what it’s been.
CPE: Do you think most of the companies you work with tend to have that expanded relationship with lenders?
Yes, nowadays lenders are requiring it. Even if they didn’t before, we’re seeing lenders on new deals say, “We looked at your financial statement and saw that you have $5 million parked with X bank. How much of that are you willing to bring over to our bank for the fact that we’re going to be lending to you?”
CPE: How are new regulations like HVCRE rules affecting the lending environment?
Essentially, it’s requiring lenders to reserve more against their loans. As a result, it’s impacting pricing, so lenders have to charge more because they have to reserve more against the construction loans. It’s also affecting their balance sheets—the amount they can lend tends to be rather finite, which is creating this liquidity crunch we’re seeing on the construction lending side, wherein lenders are hitting their exposure limits because they only have so much capital they can utilize for reserves.
It’s also been keeping lenders, from an underwriting standpoint, conservative, which is what you want your banks to do. That part overall is positive, where we’re not seeing banks doing 80 percent of cost lending, which is what we saw pre-recession. Now there has to be real equity in the deal. The sponsor can’t buy something and two years later say, “I’ve created this much value; lend against this equity that I’ve got in the land.” The lenders are lending against real cash that’s been invested in deals.
CPE: Are you finding any challenges in placing debt or equity?
We’re having to work harder because there are less lenders. We’re having to talk to more people to find groups that have capacity to lend, especially on the construction side.
The other challenge that we’ve been faced with as of late is the hiccup in the CMBS market, which has made a lot of our clients take a step back and re-evaluate whether they want to do CMBS loans. They’re asking us to try to get to similar leverage as CMBS is willing to provide, but do it through traditional sources such as banks and life companies. Those sources aren’t going to get there in terms of leverage, but there’s an education process that we take our clients through to get them there.
CPE: Do you have any other expansion plans right now?
At this point, we’re looking to hire and grow our advisory platform. That’s our primary focus, and we’re talking to different groups about potentially launching mezzanine and preferred equity lending also in the small-balance space, but that’s very preliminary at this point.