What Would You Do if You Were a Lender?
The question I always come back to when the economy stalls is this: what would you do as a commercial real estate lender – would you keep lending or would you stay on the sidelines?
Some lenders hit pause, some continue to lend, and some cherry pick the good deals that would be hard to come by during “normal” times. Lenders often have difficulty when it comes to pricing deals in uncertain economic times, and I always wonder why this is. Their caution is understandable and justified, but if a certain deal fits their underwriting criteria in a solid economy, why not stay the course and focus on quality assets and borrowers? In these unprecedented times it’s necessary to acknowledge that certain asset types carry certain risks, but many NNN transactions are recession-resistant and provide limited risk for the investor and lender.
Is structure the answer? We have seen some fully non-recourse lenders add partial recourse to their offerings but otherwise keep the same terms and stay in the game. Others continue to lend with their same policy guidelines while instituting floor rates. When the indices hit record bottoms, lenders don’t just keep the same spreads, they often increase the spread to mitigate interest rate risk. Another way to combat uncertainty is to lower the LTV and have investors come to the table with more equity; many have settled in the 65% LTV range which increases the cash flow to the investor. The more creative lenders use a combination of the mentioned methods, and have not missed a beat.
So, the question is to investors and sales brokers: what would you do during these times?