Given the low interest rate environment and competition, it’s a great time to be a borrower and a somewhat trying time for those on the other side of the deal.
That was one of the takeaway messages from four competitors in the alternative lending space who sat down and offered their views at last week’s RealCapital Conference in Toronto.
“To say it is competitive is an understatement,” said Noah Mintz, vice-president of lending with Trez Capital, the largest of the quartet of alternative lenders on the panel with $1.8 billion in assets under management.
“If you are a borrower in this room, congratulations, it is a great time to be you,” he added. “It is hyper-competitive, especially for quality deals. If you are a quality borrower with a quality asset in a decent location, the world is your oyster today.”
The Trez Capital VP added the challenge for alternative lenders and mortgage investment corporations today is to resist the temptation to stray from their core business in search of deal flow.
“It is easy to say that we have got a lot of capital to put out, but it is important to stay the course,” he said. “We say ‘We don’t chase deals, we will however chase a good relationship.’ So if you are a good borrower and we see a long-term relationship, we will do whatever we can in order to foster that relationship and do more business with that party.”
Bram Rothman, managing director of the Atrium Mortgage Investment Corporation which has $500 million in assets under management, noted the alternative lending space slowed at the end of 2014 and “has picked back up in 2015 and I think we are all fairly busy right now.”
Rothman said the biggest challenge for Atrium is not in raising capital, but rather in maintaining its pipeline of deals.
“For us, it is deal flow at the moment. After going public, we opened offices and have people on the ground in five cities – we like to lend in the core of the cities. So having people in the markets and sourcing business is the way we deal with it and the volume of transactions that we get to see in order to raise the money.”
Pierre Leonard, managing partner of Romspen Investment Corporation which has $1.3 billion in assets under management, said raising capital to lend is not currently an issue for his company. “In terms of raising capital it has not been an issue, it is really to place the money. We made a strategic decision a couple of years ago to go into the U.S. and we are seeing a lot more opportunities in the U.S.”
Similarly, Michael Carragher, Firm Capital Corporation’s vice-president of mortgage investments, said raising capital “is not an issue. We have more liquidity and demand on the investment side than we do have high- quality transactions.
“Our experience is that the non-bank market space is really not a marketplace (seeking) growth for the sake of growth,” added Carragher, whose firm has about $900 million in assets under management. “Given that you are taking on a higher-risk profile, it is really focusing on an exit strategy and making sure that you are delivering capital preservation for your unit-holders and investors.”
RealCapital panel moderator Onorio Lucchese, in the institutional lender camp in his day job as managing director of investment and corporate banking with BMO Capital Markets, asked the obvious question: Why does the real estate sector seek out alternative lenders?
Romspen’s Leonard explained that speed and flexibility are the main selling points for the alternative moneymen.
“Conventional lending practice (is) mainly policy-driven and still highly regulated and is more of a one-size-fits-all,” he said. “The interest rates might be more attractive, but the loans are not necessarily tailored to the specific needs of the borrower.”
Time, often, is also of the essence for alternatives. “The approval process can be lengthy and when you are dealing with borrowers who have an immediate need for capital, they can come to an alternative lender – and this is where we have a specific need for bridge-type facilities – and we can often work with a project that has more complexity attached to it.”
Price is definitely not the reason borrowers go to the alternatives.
“If you are a highly rate-sensitive borrower, you are not calling anybody on this panel,” said Trez Capital’s Mintz. “The reality is that there are a million things that people are looking for other than rate, the first thing being speed. I can’t tell you the number of calls we get: ‘We need to close this in two weeks, three weeks, four weeks.’ Tier Ones just don’t have that sort of flexibility.”
Alternatives also pick up the phone, said Mintz: “Most of our borrowers like the fact that they can pick up the phone at 9 o’clock, 10 o’clock at night and they can get me or my co-workers and they can ask questions about the deal and get an answer. In my case, they will hear two hooligan kids yelling the background but they will get the answer in a timely fashion.”
That is the case of Trez Capital’s top trio of borrowers who have dealt with the firm for than a decade. “They could use Tier One, but they just find it easier and more conducive to their business to use us.”
Alternatives are also not put off by words like “contamination risk” and “zoning risk” added Atrium’s Rothman, which described his firm as a niche lender in riskier deals that make the banks nervous.
“It doesn’t really fit the Tier One profile. We are paid for it but we do a lot of land financing, we will acquire it and provide interim financing and usually get taken out. We always have an eye on the exit strategy which will be from the term lender or construction lender. We will be the bridge at a point of time. We are not lending on stabilized assets, we just can’t compete on that.”