Everyone – and I do mean pretty much everyone – likes peanut butter and jelly (unless, of course, they’re allergic to peanuts). There is something about the way these two foods go together that is just pleasing.
My sense is that bridge lending and private equity – at least right now – go together as easily as PB&J. Consider…
Bridge lenders get first liens on the real estate. The risk is low. Yet, at least for a while, due to the paucity of available lenders, the interest rates are higher than what they should be. The way I would say it: bridge lenders are being overpaid for risk.
Bridge lenders look out and see more opportunities to put dollars to work than in many years – maybe more than ever – yet many of them are starved for capital.
Now, take a look at the private equity real estate players.
They have tons of capital raised – I mean zillions – but they are having a lot of trouble putting it to work. Many – forlornly – are waiting for a desperate borrower to come, hat in hand, begging for 20% high yield debt money. Understandably, borrowers are loath to do that, so not much happens except that real estate funds sit with their dollars going hungry.
Real estate funds – the smart ones anyway – are much more concerned with not losing than they are with winning. This means, in essence, that they look for situations where heads they win and tails they also win.
It is hard to imagine a better place for this outcome for a real estate fund than in bridge lending.
If all of the foregoing is true, why hasn’t this combination been going on for years?
The answer is simple: There hasn’t been a confluence of artificially high interest rates plus artificially high piles of unspent fund capital in a long time. These two trends have now come together to permit PB&J to be replaced by Private Equity Real Estate & Bridge Lending as the ultimate combination.
To outline how private equity real estate and bridge lenders should work together, it is pretty straightforward. The bridge lender finds the deals, does all of the work to source, close and service the loan, plus puts in a smallish percentage of the needed dollars. Anything from 1% to 25% would be the range. The real estate fund would put in the rest of the dollars. There would be a joint venture, co-lender, participation, or other arrangement between the real estate fund and the bridge lender that would allocate upside, downside, and control. This could be done on a one-off basis or a programmatic basis. And voilà! Real Estate Private Equity & Bridge Lending!
I am not enough of a math guy to calculate the returns to the real estate fund – and of course, returns vary with various factors – but I generally believe that the first mortgage rates for bridge loans are roughly 9% to 10% and with modest (50%) internal leverage the total return to the real estate fund will be in the mid-teens.
No – this is not twenty percent money – but twenty percent money comes with concomitant risk and this comes with very close to zero risk. As an investor, I would take that risk/reward any day since I am being overpaid for the risk.
Finally – and you knew I would end this article this way – I am informally acting as a hub between the bridge lenders hunting for capital and the real estate funds providing it. If you are either one, I urge you to give me a shout.
Bruce Stachenfeld aka The Real Estate Philosopher®
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Client Corner
As time goes on, I see more and more clients seeking more and more opportunities in real estate. To the extent any of them are not middle-of-the-road or proprietary, I am referencing them here in hopes that readers may contact me about these opportunities and be introduced to my clients. Here are the ones that come to mind:
Stability: I simply don’t agree with most of my clients on this, but many players are waiting for the markets to stabilize before putting their toes in the water to make investments. I believe that this is not an optimal way to proceed since there is typically maximum risk in a stable-seeming market when things eventually become unstable – to wit the beginning of 2023 – and there is the lowest risk in an unstable market since there are opportunities to obtain bargains – i.e. right now. Then the bargains close-to-immediately vanish when the market stabilizes. If you are open to doing deals right now, please feel free to contact me.
NYC Office: As per the last client corner, we have clients seeking to invest in NYC office properties, including fee purchases, loan acquisitions, restructurings, preferred equity, and much more. I mention it again as this client interest is growing significantly.
Preferred Equity: As per the last client corner, we have (many) clients seeking to place preferred equity into real estate deals nationwide, but mostly in major US markets, including both (i) development and value-add transactions and (ii) rescue capital for challenged deals.
Ground Lease Financing: As per the last client corner, we have clients seeking to make fee-level ground lease investments nationwide, with a particular focus in the top 20 MSAs. Such ground lease transactions can provide a lower cost of capital for both: (i) acquisition and development transactions and (ii) pre-existing deals seeking repatriation of capital.
If you would like to interact with our clients on any of the foregoing, please let me know.