Ralph Cram Net Lease Envoy

Envoy Discusses Construction, Bridge Loan Lending, Future of Net Lease

by Sarah Daniels

Ralph Cram, president and manager of Envoy Net Lease Partners LLC, is responsible for providing strategy, marketing and investment advice on all aspects of net lease property investments. He believes 2021 will be a banner year for net lease, and that Envoy is particularly well suited when it comes to providing “one-stop shopping” for developers.

Finance Insight: How is Envoy is different from a “normal” commercial real estate finance provider?

Cram: Envoy’s focus is construction and bridge loan lending on single-tenant, net-lease properties in most commercial real estate segments such as retail, restaurant, medical and industrial properties.

What differentiates us from most lenders is that first and foremost, Envoy can lend up to 100 percent of the total project costs. A developer receives all the project’s capital from one source without having to take on outside investors and time-consuming joint-venture (JV) and related agreements. Envoy’s “one-stop shopping” allows developers to concentrate on what they do best and provides the entirety of financing and other capital considerations for a given project.

Second, the only thing we do is lend on net-lease properties, so we are experts. We don’t do an apartment loan one day and a PPP loan the next. We don’t leave, enter and then re-exit the net-lease market and go lend on other property types or halt our lending during times like COVID-19. Net-lease property lending is all that we do. We often know of new tenant lease clauses before others because we see leases from all over the country from the same tenant.

Third, this streamlined approach allows us to be fast, especially with repeat borrowers. We have closed construction loans within three weeks, on occasion, for our repeat clients.

Fourth, we can go anywhere our borrower clients want to go nationwide. We don’t have the issue of lending territories often encountered with local relationship bankers. Several of our clients have tenants that take them around the country building stores for them. Our clients don’t need to find a new lender — when they leave their home market, Envoy follows them nearly everywhere in the continental United States.

FI: Why do net-lease developers need specialized financing products?

Cram: Knowledge, speed, and full capital stack solutions. Net-lease developers are always one bad deal away from losing their tenant relationships. Envoy reduces last-minute surprises because we know the issues and because we handle only net-lease projects. Bad appraisals don’t stop us. As I mentioned, we can follow developers around the country. We close and service Envoy’s loans in house, so we can resolve issues quickly. Our borrowers deal with the decision makers and capital source directly.

And yes, we give the developer all the capital he needs to complete the project once it’s ready for construction. No need to split profits with investors. No need to negotiate complex JV agreements or find mezz or subordinate financing. No providing multiple investors updates and accounting or other investor issues. Our construction loan product doesn’t take any backend profits splits. The developer keeps the profit upside for themselves.

FI: What type of terms do your products carry? Why are these beneficial to your sponsors versus traditional financing methods?

Cram: We like to say that Envoy’s debt is expensive, but it’s cheap equity. When you combine bank debt with JV requirements from other sources versus our total cost of capital, Envoy is usually cheaper. Regarding terms: our typical construction loans have 1 to 2 point origination fee, 8 to 9 percent interest rate and 0.5 to 1.0 percent exit fee. Pricing is determined by the tenant’s credit rating, transaction size and potential deal volume for repeat business with the client. Our loan terms are usually 12 to 15 months, with several extension options. For investment-grade tenants, today we can get to pricing under 10 percent all-in with proven pipeline and deal volume.

FI: The net-lease sector has been on fire for the past two years. How has this affected your business?

Cram: Really, the fire really became a forest fire starting last summer, especially for long-term investment-grade net-lease properties. In 2021, our developers with investment-grade tenants are paying off loans within 30 days of lease commencement and thus loans are paying off faster than normal and our clients are setting new record-level cap rates on these sales. The issue for net-lease developers is that there are a decreasing number of tenants that are expanding, costs are increasing and tenants want lower rent factors and better lease terms, which developers have to give them. So, the supply of new net-lease properties will be lower this year due to COVID restrictions in 2020 and demand is even higher than in years past. The COVID-19 pandemic is creating a wave of older property owners in other market segments, especially apartment owners, who want to sell and trade into net-lease properties. There are just not enough long-term net-lease properties to meet this growing demand. We don’t see this situation changing until 2023, unless tax laws change next year to severely restrict 1031 tax-free exchanges. If those tax law changes look plausible, there will be a huge rush to sell and trade into 1031 tax-free exchange properties in 2022 before the door closes. Add on top of this the billions of dollars of capital that net-lease REITs raised last year, and you have a very active sales market leading to increasing sale prices and decreasing cap rates. Record-setting sales are not done yet.

FI: What criteria does Envoy hold for financing? How should a new client present itself to you?

Cram: Conditions for closing an Envoy loan include a signed NNN lease of 10 years or greater in length and the property “shovel ready” in terms of permits, use/entitlements and contracts. We require that construction starts within several weeks of loan closing. We finance both investment grade and select non-investment grade tenants up to 80 percent loan to value and 100 percent loan to cost. Our sweet spot is between $2 million and $8 million loan transactions, but we can go up to $20 million for select transactions.

FI: What makes Envoy different from other private lenders specializing in net-lease lending?

Cram: Envoy’s cost of capital is usually 50 to 200 basis points lower than all our private lender competitors. If we like the transaction and the potential relationship, we will beat the other private lenders hands down. Second, other lenders in this area tend not to work out issues, such as the delays that have been commonplace with COVID, and they often demand repayment immediately upon default or at the loan term maturity. Due to its capital sources, Envoy tends to work with borrowers to maintain long-term relationships understanding the best way out often aligns with everyone’s interest and not just short-sighted and immediate repayment. Envoy has been in business for nine years now and funded 79 net-lease transactions. As a result, we are focused on repeat business with our clients for the decade to come.

Finally, Envoy offers multiple capital solutions. So, if a developer has a good project with a non-investment grade tenant or a two-tenant project that doesn’t qualify for our construction loan program, we have a JV equity program that we can fund the developer’s equity needs. Or say that the developer already has a good banking relationship that is willing to lend 85 percent loan-to-cost at 4.0 percent interest rate — we have a fixed preferred equity program for the last 15 percent of the equity that the developer needs for the project. Envoy has multiple pockets of capital that can meet the capital needs of our developer clients. The other net-lease private lenders do not offer this wider range of capital solutions for their developer clients.

— This article is posted as part of REBusinessOnline’s Finance Insight series. Click here to subscribe to the Finance Insight newsletter, a four-part newsletter series, followed by several video interviews delivered to your inbox in March 2021.

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