By Sanford Herrick, founder and managing principal, Case Real Estate Capital, LLC
During the market’s recovery from the worst recession since The Great Depression, a vast number of once under-water commercial assets — transitional properties — were recapitalized through private lending sources with the goal of achieving conventional financing after stabilization.
While the low-hanging fruit has now been tended to, a wide range of opportunities remain for private lenders to work with experienced owners and developers in unlocking the true value of properties.
A question often asked is “What qualifies as a transitional project?” The answer is that this market includes a myriad of assets experiencing capital, cash flow, maintenance, or positioning issues.
The range includes properties that have been damaged through owner negligence and properties that are undersized for their market sector requiring expansion and upgrades, as well as gentrifying neighborhoods.
A gentrifying market can be an entire borough, like Brooklyn, New York, where huge swaths are in various stages of being reconfigured and retooled.
In particular, neighborhoods like Bedford-Stuyvesant and Bushwick are undergoing a tremendous revitalization after years of little to no activity, and now there are only a handful of properties that cannot be reimagined. In the Williamsburg section of Brooklyn, a meaningful transformation has already occurred.
Revitalization can encompass whole cities, like Detroit, Michigan and Youngstown, Ohio, which were sent into downward spirals during the past decades and have seemed to hit their absolute bottom.
In cities like these, pockets of experienced owners and developers are realizing that there is still infrastructure to work with — and opportunities — there.
The goal is to bring some semblance of prosperity back to the region by transforming and stabilizing properties, and, by extension, the neighborhoods in which they are situated.
Given these parameters, the market for transitional projects is both quite broad and deep, with a majority of the assets falling in the middle market range.
Without surprise though, words like bankruptcy, foreclosure, contamination or property mis-management are not music to the ears of many.
Owners of these assets have often exhausted traditional liquidity channels and turn to private lending sources to provide traditional and short-term bridge loans, first mortgage financing, and DPOs as well as a range of other financing solutions.
When it comes to transitional assets, each has individual characteristics. Private lenders minimize risk and create value by evaluating each loan on its own merits, based on the borrower’s unique situation and business plan, as well as local market conditions.
A common thread sought by many alternative lenders is to see opportunities in which the asset is reimagined and retooled.
Transitional assets can be situated in unlikely areas, like Westport, Conn., a desirable coastal town in Fairfield County with proximity to Manhattan.
Westport is seeing “stable” properties increase substantially in value, as well as those in poor repair or under built, through reimagining and redevelopment.
For example, a leading northern New Jersey-based commercial real estate investment firm funded a $1.4 million construction loan, in which the collateral was three, high-end single family residences in Westport.
At closing, the properties included a 90 percent completed, 5,000-square-foot residence with views of Long Island Sound built on a previously vacant lot; a 3,600 s/f home, expandable to 5,000 s/f, slated for demolition and total rebuild on an infill site; and a third home to be built on a property purchased from an estate.
Within 12 months, the once under-utilized properties have created substantial profits. The investment firm has seen a deal IRR of more than 30 percent.
Amongst most lenders, a level of uncertainty does exist on how much the market has risen and how much room there is left to grow. Sought-after deals are those with
LTVs not exceeding 75 percent of loan to stabilized value and a 12-month timeline to liquidity – with a possible six-month extension as warranted. And unless assets are situated in dramatically-changing neighborhoods, there is limited interest from private lenders in deals with terms extending past two years.
Even with the continued, albeit slow, recovery nationwide, and a fairly healthy Northeast in particular, real concerns exist around the globe.
Unknowns include how Europe’s widening financial and political crisis in Greece, along with Portugal, Italy and Spain, may impact U.S. capital markets.
Another unknown is the fallout of Puerto Rico’s severe debt crisis. Further, questions loom this summer about China’s economy with the government’s range of interventions to stabilize the country’s stock markets. Will those measures halt stock market plunges in China, and what effect will it have on capital markets here?
Although those answers are unclear, a window of opportunity across the U.S. will remain for private lenders to continue unlocking the true value of properties and neighborhoods in transition.
NOTE: This article originally appeared in Scotsman Guide.
