It may be too early to call it a trend, but industry experts at Northeast Bank are watching an uptick in private CRE lenders and debt funds utilizing single asset or portfolio leverage for their commercial real estate loans. Why is this option attractive?
Northeast Bank and its team of national CRE lending experts outline five factors why an increasing number of private lenders prefer this option:
1. Deliver higher investor returns.
“Clearly, increasing investor returns is reason number one,” according to Solomon Garber, Senior Vice President of Business Development, Northeast Bank. “Meeting or exceeding investor expectations is the name of the game for private debt fund managers.”
“The math speaks for itself,” says Jonathan Levirne, Senior Vice President of Business Development. “Most debt fund managers are solving for double digit net returns to their investors; having the ability to lever a loan will easily satisfy that and then some. Depending on the whole loan rate, Northeast Bank helps their customers achieve returns in the range of 12-20% on a net basis before fees.”
2. Low closing costs.
Keeping transaction costs down with the leverage provider is critical because it can eat into the rate of return. Northeast Bank’s loans do not have origination fees and the closing costs are minimal. The tradeoff is the Bank charges a slight premium for its coupon rate, but its counterparty can keep all the origination and exit fees. For example, a private lender can keep the entire origination fee of 2% on a $10 million whole loan. This means based on bank leverage of 75% and a retained first loss piece of 25%, the private lender will earn 8% on its investment as opposed to 2%. “That is compelling,” says Levirne.
3. Freeing up cash opens up greater capacity to do more deals.
“Leverage can also mean more kinds of deals,” notes Tim Tower, Senior Vice President of Business Development. “Lenders can spread around their risk or they can try to ladder it, to create more of a portfolio of deals.” In addition, this portfolio approach not only increases the rewards, but spreads the risk.
4. Patient leverage is key during volatility.
“What we have learned in times of volatility, such as the pandemic, is that it’s imperative to our customers to have a lender who will work with them as loans need to be modified, extended, or restructured” says Levirne. Tower adds, “because we’re a bank, our capital is patient, it’s in our DNA.”
5. Offer more competitive rates to borrowers.
In addition to the factors above, positive leverage gives private lenders the ability to be more competitive by offering lower rates to their borrowers. Tower states, “with leverage, investors can now achieve the same return as if the loan was not levered but target a lower rate at the new whole loan level and attract a higher quality, lower risk deal.”
“Because we’re in this business, we make loans similar to the loans our customers make, so we understand what customers need better than most,” adds Garber.
Northeast Bank specializes in complex CRE deals and has garnered a national reputation for speed, creativity, and certainty of execution across the country. “We will follow our customers to the ends of the earth to do a deal,” says Levirne, “and our in-house capabilities support that.” Garber concludes, “closing deals demands creativity in terms of both flexible structuring and competitive pricing, as well as a sense of urgency. Reliability is key.”
Northeast Bank (NASDAQ: NBN) is a full-service bank with assets over $1.2 billion, offices in Maine, Boston and New York with a national commercial real estate focus. Over the last decade, Northeast Bank has originated and acquired over $3 billion of commercial real estate loans in 44 states.
Visit northeastbank.com/lender-