by Adam Luysterborghs
In the aftermath of the recent financial crisis, heightened regulatory scrutiny of bank balance sheets has forced commercial banks to deny loans to more and more owners of real estate.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a driving force behind this accelerating trend. Dodd-Frank stipulations require that banks set aside more capital for each loan as insurance in case a borrower was to default. These regulations have been particularly problematic for small-scale developers and building owners, as smaller loans are more often deemed non-bankable.
Non-bank lending institutions, or “shadow banks,” are not subject to the same depository regulations of commercial banks and have been able to provide needed funding to large development projects.
However, small development projects and financing transactions have been neglected by these large hedge funds, as they are not staffed to originate large numbers of small investments.
As commercial banks are being transformed from being integrated financial institutions into retail banking service providers, other former bank functions are being transferred to the shadow banking system, allowing it to boom and fill many previous bank roles.
Bridge lenders like Avant Capital Partners provide a solution to this inefficiency in the lending system by offering short-term loans to small-scale real estate developers, owners and operators. Bridge lenders have become key players in the shadow banking system, as they have the flexibility to front borrowers their desired capital without being held back by regulations, inspections, fines and penalties that have become commonplace in commercial banks.
Avant Capital Partners’ bridge lending program is geared towards assisting commercial and residential developers in capitalizing on time-sensitive and other non-bankable transactions that require flexible funding. Borrowers of bridge loans are typically involved with up to 10 projects at any given time. They are experienced developers, but aren’t large institutions with over 100 people on their payroll.
The project sponsors that these bridge loans back are adept at seeking out non-bankable and off-market opportunities that large institutions are not set up to capitalize upon. Avant Capital Partners has the capacity to lend up to $10 million on any single transaction, but a typical deal ranges from $2 million to $5 million and, to a large hedge fund, these smaller loans would not be worth the return on effort. Recently, the firm closed a $3.275 million loan secured by a mixed-use property in Brooklyn to pay off a defaulted loan.
The company also provided a $1.6 million loan for the payoff of a construction lender on a condo deal in Long Island. These types of deals are commonplace for bridge lenders but regulators would criticize commercial banks if they made the same loans.
Since 2009, there has been a growing gap between the number of loans and deposits in U.S. commercial banks as loan origination has just recovered to post crash levels, while deposits are up dramatically. Banks are taking on more loans than they were just following the financial crash, but their rate of doing so is much slower than it was prior to the recession.
While risky and predatory lending may be some of the causes of the 2007 and 2008 financial crisis, tight-fisted regulations will certainly not resuscitate borrowers when they need it most. Proof positive of this is that, even with interest rates at all time lows, home ownership is decreasing, currently at just 64.8 percent due to lack of available financing for marginal borrowers. Financing for the development and redevelopment of real estate is subject to these same forces.
The fear of another financial crisis, manifested in high regulatory oversight, has derailed a major function of commercial banks. Ironically, banks will not lend to the citizens who suffered at the hands of the same predatory lenders seven years ago due to the very regulations designed to “protect” them—this is like closing the barn door after the horses have already escaped. Strict regulations and FED-guided interest rates are meant to keep the United States economy from another recession, but homeowners and small businesses are suffering.
While banking no longer relies upon trust between bank and borrower, Avant Capital Partners bridges this widening gap in the real estate lending system. The FED and bank regulators may be attempting to save borrowers from themselves, but Avant Capital Partners can maximize its clients’ success in its unfettered regulatory environment.