ACRES Capital Talks Alternative Lending and Its Role in a Downturn
Mark Fogel, president and CEO of ACRES Capital, believes alternative lenders can maintain their flexibility and creativity where perhaps more traditional lenders cannot. He believes this will be important as the country continues its unprecedented upcycle, with a potential downturn threatening in the next 18 months or so.
Finance Insight (FI): As an alternative lender focused on the middle market, can you tell me a little bit more about alternative lenders and your specific areas of expertise in comparison with traditional funding sources?
Fogel: Traditional lenders offer an important role in most communities as a source of funding. However, they are restricted by regulations that impede their ability to take on riskier transactions and go higher on the capital stack. In this regard, alternative lenders can step in and provide capital and opportunity for those projects that are going through a redevelopment or are repurposed from their original business plan.
FI: Do you lend against all property types and pursue projects in all geographical regions of the U.S.?
Fogel: ACRES seeks out opportunities on an asset-by-asset basis. We do not necessarily follow market trends, but rather identify alternative situations where, from a debt perspective, our basis is low and the opportunity to create value can be realized. We are geographically agnostic but tend to find opportunities outside of primary markets where there are growing economic environments.
FI: What advice do you have for an investor who has a project in need of a short-term bridge loan to complete a property or bring it into its next phase of development?
Fogel: Our best advice is to know the lender you are partnering with. Financing is the first step to capitalizing your project, but not all lenders are equipped for the long haul. It can be easy to fall into the trap of being short-sighted and accepting the deal with the lowest interest rate – however, we don’t recommend this for multiple reasons.
First, your initial “gains” in these scenarios are nothing compared the equity you may forego, making your investment less valuable overall. Second, there is a significant amount of bureaucracy and red tape you may encounter if there are complications in the project’s progress, and your lender may not be able to accommodate your servicing requests because the loan has been securitized.
FI: Just how well-versed in commercial real estate does an alternative lender need to be?
Fogel: Real estate is fairly straight forward in a good economic landscape. It is when the economy turns that a seasoned lender can partner with a borrower and offer their real estate experience and hands-on approach to get a project delivered in a timely manner with less monetary impact. At ACRES, our asset management team is a resource for our borrowers where site plans, budgets and construction are monitored for efficiency and timeliness. By providing this service, we allow projects to have a greater chance of completion, resulting in a benefit to the sponsor and the greater community.
FI: What is the current competitive environment like for alternative lenders? Are more alternative lenders continuing to crop up as the industry faces the possibility of a downturn in the next several years?
Fogel: Competition continues to emerge in the alternative lending space, but these lenders are not all seeking the same investments. Many are focused on “scratch-and-dent” assets geared toward the collateralized loan obligation (CLO) market. Others have strategies that revolve around certain asset classes or regions. Some stick to loans below $10 million and others won’t look at a loan below $100 million.
Many lenders participate or sell down their positions and others hold entire loans on their balance sheets. The market is enormous. Generally speaking, there is plenty of opportunity for all the current players. More lenders are cropping up as those with capital are eager to invest in safer commercial real estate debt products as opposed to equity. Many investors feel that values have peaked and are concerned that there is a real danger that equity stakes will be eroded.
FI: What are some of the biggest mistakes inexperienced lenders or sponsors make when it comes to taking on a new loan for a commercial real estate project? How can these errors be mitigated before they occur?
Fogel: By far, the biggest mistake most lenders make is not truly understanding all of the risks associated with downside scenarios and not properly structuring the loan to consider such scenarios. Worse yet, many lenders are not staffed properly to continually analyze transaction risk throughout the life of the loan, and do not have the resources to deal with defaults and workouts. Loans are easy to make; the hard part is getting paid back in full. Sponsors, on the other hand, are generally overly optimistic with their business plans. They, too, should better contemplate downside scenarios and determine upfront how they will mitigate potential problems and losses.
— Interview by Nellie Day. This article is posted as part of REBusinessOnline’s Finance Insight series, leading up to MBA CREF 2020. Click here to subscribe to the Finance Insight newsletter, a four-week newsletter series, followed by video interviews from MBA CREF.