As senior lenders continue to shrink their share of the capital stack, they are getting chummier with mezzanine lenders.
Banks and mezzanine lenders are teaming up to acquire and build real estate as a way to simplify and speed up deals, a group of lenders and borrowers said during EisnerAmper’s Real Estate Private Equity Summit Wednesday. Bank of the Ozarks, for instance, has some 20 different mezzanine lenders that it frequently works with, said Jonathan Aghravi, a debt broker at Eastern Consolidated . If Ozarks provides 50 percent of the necessary financing for a deal, the brokerage will then turn to these 20 different mezzanine lenders to fill out the rest of a project’s cost.
“If, worst-case scenario, they have to step in to a finish a project, it’s in a location they are comfortable with, it’s an asset type they are comfortable with, and it makes the senior lender more comfortable because they know that mezz lender won’t allow that project to fail,” Aghravi said.
Having these built-in relationships, the panelists said, also helps simplify the often onerous process of finalizing an intercreditor agreement.
“We’re seeing a lot of our lenders building relationships with seniors and matching up, and I think that’s very productive,” said Michael Maturo, president of RXR Realty. “From a borrower’s standpoint, having that one solution is very helpful, particularly, because they have documents that they’ve already agreed to.”
In September, RXR finalized a $300 million mezzanine loan to Extell Development for its condominium project, One Manhattan Square. The loan was contingent upon Extell closing on its construction loan, which was led by Deutsche Bank and Natixis.
Citigroup Global Markets’ Marcus Giancaterino said the bank will take on deals where a mezzanine investor has knowledge of the asset and the market and may be compensating for an otherwise weak borrower or sponsor.
“We are brought deals from mezzanine investors, who say ‘look, we think this deal will be fine, we know the market, we know the asset, and if anything goes wrong, we’re the owners,'” Giancaterino said. “They may actually be our customer, and the borrower will not.”
When asked if he works with so-called loan-to-own mezzanine lenders, Giancaterino said it’s not that the lenders necessarily want to own the asset, it’s that they are prepared to take over if need be. The idea, too, for the senior lender is to have as simplified a lending structure as possible. Giancaterino said most deals of this kind have single investors in each mezzanine class, so that if the borrower defaults, the assets goes directly to the subordinated debt lender.
The panelists discussed how the debt market has tightened — especially when it comes to construction loans — and how non-regulated institutions have stepped in to fill the financing gaps. Giancaterino pointed out that a string of recent CMBS deals had a 60 percent loan-to-value, compared to a couple of years ago when the LTV was well into the mid-60s range. At the same time, he said the market is showing some much-needed discipline. He pointed to the sale of Stuyvesant Town-Peter Cooper Village in 2006, saying that it was “predicated on a business plan that was highly speculative” and resulted in several CMBS bondholders suing CWCapital — the special servicer that controlled the complex owners before it was bought by Blackstone Group and Ivanhoe Cambridge.
Giancaterino also lamented that federal regulators are scrutinizing commercial real estate lending. This year the Office of the Comptroller of the Currency has repeatedly issued warnings to commercial real estate lenders, urging banks to strengthen loan terms. Aghravi said he’s noticed the impact.
“You will call a bank that you do a lot of business with, and there was an instance last month where they may have given you a quote on a multifamily in the Bronx and they’re like, ‘we just had the regulators in there, we can’t do multifamily in the Bronx anymore or at least, not for the next few months,'” he said. “They are constantly being regulated.”
As banks pull back on what they are willing to finance, borrowers are going to non-traditional, unregulated lenders like Blackstone, Giancaterino said.
“That’s where the money’s going. And ironically, where are they getting their financing? The banks,” he said. “So, it’s the law of unintended consequences, and I hope, God willing, it won’t explode.”