Based on observations and extensive research, there is significant losses for acquisitions that occurred at the "peak" of the market during 2006-2008, as a result principals and borrowers who have leveraged up during these times are being punished now. Concurrently those hard money lenders who lent up to 80-100% loan to cost during those times are now trying to liquidate senior debt on non-performing, un-finished, or under-funded development sites. The current focus for real estate private equity is on distressed debt and distressed real estate investments.
The heavy hitters in the ring right now are ultra elite individuals, royal families, well capitalized private equity firms all seeking a select group of trophy / prized assets which are now being offered at liquidation values. Many major players in the market at this time have the strong belief that Manhattan is "on sale", the only question on would have is if the “dip” will continue or will absorption speed up thus leading to a an increase in demand- due to the fact that supply has halted (hardly no new construction-
On the financing and lending arena, there are new real estate investment debt firms who are aggressively seeking to invest in bridge loan or interim gap situations where traditional or bank financing is not available at this time. The majority of the private commercial lenders who have completed 1st stage funding for bridge funds during Q3 2008- present are now placing a heavy emphasis on distressed debt transactions as well as performing and non-performing acquisitions and lending for note sales. An all too common scenario (as stated above in the vulture investor perspective)
It is very interesting to see how the private commercial lending environment has adapted to the current market conditions. Well capitalized private commercial lending has actually been more lucrative now as opposed to previous times of prosperity (2006-2008). During the "peak" economy, hard money lenders were lending capital based on high loan-to-values (LTVs) and based on even higher expectations of inflated rents and inflated sell-out valuations. This feeling of high expectations was a result of the "euphoric" state in the markets at the time- both on Wall Street and Main Street. Unfortunately as a result of financial gravity, salaries for the average American did not increase in tandem with the increase in housing prices- thus resulted in housing demand plummeting and led to a chain reaction.
At this point in time, private commercial lenders take much less risk; on average private hard money investors only lend 50-65% LTV based on conservation valuations of the underlying commercial real estate asset. In addition lender points (percentage points of the funding amount collected by the lender) can range from 3-6%, and interest reserves (a certain amount of pre-paid interest taken out of the closing proceeds) is another means to receive immediate returns at closing for the bridge loan fund- thus lowering overall risk for the fund, on top of the very conservative LTV ratios and conservative appraisals (collateral valuation). These points and interest reserves are more when compared to private lending guidelines during 2006-2008.
As one can see, private commercial lenders are taking less risk on lending and in most cases are collecting 20-40% ROI immediately at closing. In my personal experience and my opinion, private commercial lending is a lean and efficient business model when compared to the traditional banking and lending model. Hard money capital demand is sufficient enough for the hard money lender to charge 10-15% annually- which is a superb annual return for 3rd party capital- considering the double digit negative returns elsewhere in the United States. In addition, once one factors in lender points, interest reserves, due diligence fees, and syndications, a private commercial lender's return at closing can range from 20-40%, returns can be enhanced via SYNDICATING a large portion of the loan to a syndication partner.
It will be very exciting to see where the hard money guidelines will be during the next up-cycle. Hard money lenders and private commercial lenders invested with unrealistic expectations and are now being severally punished. "Vulture" investment firms, ultra elite families have come out unscathed and cash-strapped ready to "shop" for trophy assets.
Similarly to a championship NFL or Baseball team for "sale" (usually an off-market deal) due to performance, prized hotels, pristine multifamily luxury rental buildings are up for sale due to the fact that in many cases NOI is not sufficient to cover debt service (especially for properties that were acquired via highly leveraged means; mezzanine equity and preferred equity). This is an amazing and extremely lucrative opportunity for vulture and long term investors who are willing to "carry" the asset until the economy recovers, and we seeing examples of this occur on a daily basis it every single day; 7 out of 10 principals on the buy side are looking for distressed opportunities. The private commercial lending climate has definitely changed. Based on our encounters and deals, make sense deals are now 50-60% discounted (compared to peak markets conditions) in the commercial arena. It definitely is extremely exciting seeing how capital flows and to what rate it will flow to distressed debt and distressed real estate opportunities.
About Lexington Equities:
Lexington Equities is a Manhattan based distressed debt and commercial real estate principal investor and advisory firm with special exposure to the distressed debt capital markets. Lexington Equities utilizes ultra high-net worth individuals, accredited & institutional investors for private commercial lending in isolated hard money transactions.
Financial strength, confidence, creativeness, and full capacity to complete "time of the essence" deals when execution is critical. We are Lexington Equities; We Are the Opportunistic Capital Source.
For more information please contact:
Sam Mishra VP of Investments at Lexington Equities
(212) 953-4425 Sam@LexingtonEquities.com
