Niche Lenders Needed Now More Than Ever
Niche Lenders Needed Now More Than Ever
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John Rebchook – Nov, 2012
Interest rates are at all-time lows and banks have a record amount of cash on hand to lend – $1.7 trillion, according to the Federal Reserve.
Yet, banks are often on the sidelines when it comes to making commercial real estate and business loans.
Banks’ inability or reluctance to lend, even to clients with great track records with lots of equity in their income-producing properties, is providing an unprecedented lending opportunity for niche lenders that make private equity loans, frequently called hard-money loans, according to experts in the field.
“I’m trying to make common- sense loans,” said Bob Amter, an owner of Denverbased Montegra Capital Resources Ltd.
These loans, which apparently are not tracked by any regulatory agency and are sometimes called part of the “shadow banking” system , are shortterm loans that carry higher – than-market interest rates.
But these lenders are not loan sharks.
When the loans are made – typically carrying interest rates in the range of 9 percent to 14 percent in today’s market – they provide a needed service to the borrower who can’t get a bank loan or one from an insurance company that would carry a much lower rate.
The borrower typically plans to either refinance the loan in a relatively short time into a much lower rate or sell the property and pay off the high-interest loan.
Investors, meanwhile, can get a high rate of return in a Low-rate environment.
At Montegra, for example, the 100 limited-partner investors in a $16 million fund it manages have received a net return of 9 percent annually since it was created in 2009.Along with Amter, Bill Stanfill is a general partner for what is called the Montegra Capital Income Fund LP.
Montegra is opening up the fund to “accredited investors.” These also are known as “sophisticated investors” who typically either have annual incomes of at least $200,000 and or at least $1 million in assets outside of their primary homes.
Investors need to pony up a minimum of $150,000 to become a limited partner in the Montegra fund.
Amter, who says the phrase “hard money” may have a negative connotation with some people, is the Denver granddaddy of this alternative to bank borrowing.
Amter has been making these types of loans for the past 41 years, weathering and prospering during the biggest challenge in his career, the financial meltdown that was the worst in the U.S. since the Great Depression.
“No one in Denver has been doing this as long as I have and I’m not sure anyone in the country has,” Amter said.“At least I have never heard of anyone doing it longer.”
In one recent deal, Montegra made an $825,000 loan for a first mortgage on a Conoco gas station on East Smoky Hill Road in Centennial.
The owner, a limited liability company controlled by Richard Oneslager, had a $500,000 bank loan on the property, which was appraised at $2 million.Oneslager wanted to raise an additional $325,000 for a real estate investment.
The bank wouldn’t give him a “cash-out” loan, but Montegra did, providing him with an $825,000 loan with a oneyear term. It closed in less than 30 days. Oneslager used the money to pay off his $500,000 loan and had the $325,000 available to invest in his next real estate venture.
Oneslager expects to refinance the loan after a year and get a bank loan, since it no longer will be a “cash-out” Request, Amter said.
Speed of approval is one of the benefits of getting a loan from a company like Montegra.There is no red tape. If Montegra is comfortable with the asset and the borrower, Amter gives it a green light quickly.
“I don’t have to run a loan past a committee,” Amter said.“When I am shaving in the morning, I’m looking at the committee.”
In another deal, Montegra loaned $750,000 to Susan Underhill to buy the historic Emerson mansion at 1601 S. Emerson St. in Denver from a law firm.
She converted the building into what Anthem described as a “very creative spa for women” called Fitness, Focused and Fueled.
This business is a prime candidate for a U.S. Small Business Administration guaranteed loan, which would provide her with very favorable financing, Amter said.
“But there is a Catch-22,” Amter said. “She needs 12 to 18 months of an operating history to get the SBA loan. But given that it is a brand-new business without any operating history, no bank, lacking the SBA guarantee, would fund the loan.”
Like all of the loans it makes, there is no amortization. It is interest only.
“Susan plans on paying off this loan once her operating history is sufficient to qualify her business for a SBA loan,” Amter said.
This alternative lending business may sound like a win-win that is good for the borrower that can’t get a bank loan and good for the investor, which Earns far more than it could get in a bond-like instrument.
But a number of Amter’s competitors in Denver went out of business during the recent real estate crash, although others, such as Fairview Commercial Lending, remain in that space.
“I could tell you 20 people in Denver who were making hard-money loans who went out of business” in the real estate crash that started in late 2007, said Andy Miller.
Indeed, Miller, a principal of the Miller Frishman Group, in 1998 launched Rapid Funding, a hard-money lender for land developments, shopping centers, office buildings and construction.
Six years ago, he had $180 million in hard-money loans outstanding.
“I got out of it in 2006,” he said. “I saw the meltdown coming, so I got out.”
Miller said borrowers and lenders must understand what hard-money lending means.
“Hard money is a bridge loan,” Miller said. “It is never meant to be permanent financing.That is very important. It is not permanent financing. If you are a hard-money lender, you have to understand you are going to be taken out either by another lender or a real estate syndication or a sale.”
But in 2008 and 2009, when property values were declining, a number of hard-money lenders were stuck with properties they could not sell or refinance, dooming them, he said.
“They were stuck and when values went down precipitously, there was no way out,” Miller said.
Miller, with a wide ranging background in almost every aspect of commercial real estate, said he would consider making hard-money loans today, but he would be extraordinarily selective.
“It would have to be for a property that I wouldn’t mind owning,” Miller said. “It would be something that I would be absolutely comfortable in owning and operating and would know I could do so profitably.That way I wouldn’t care if the borrower couldn’t make his payments because I would love to own it anyway.”
Glen Weinberg of Fairview Commercial said the default rate for the hard-money loans he makes is well below that of most banks.
Weinberg, who typically makes loans between $50,000 and $650,000, said people outside of the business might be surprised by the high caliber of most of his borrowers.
“These are not the stereotypical image of hard-money borrowers,” Weinberg said. “We are getting a huge uptick from extremely qualified borrowers who can’t get bank loans for one reason or another.”
He estimates his Colorado business is growing by a 20 percent clip.
“Banks aren’t lending, but we are,” Weinberg said.
Amter said he has only had one default with one of his borrowers and that was an extremely unusual situation. In that case, his group lent against a restaurant in Vail and the owner died. The family was either not prepared or able to operate the restaurant, so his group is in the process of selling the restaurant to pay off the loan.
Amter said a number of East Coast hedge funds are starting to enter the alternative lending market as a way of getting a higher rate of return in today’s low-rate environment.
“Personally, I would rather borrow money from someone in Denver that I know than send a check each month to some group in New Jersey,” he said.
And a penny stock company in Utah last summer launched a hard-money lending division, although it hasn’t yet released any loan data information with the Securities and Exchange Commission.
For qualified people who want to invest along with him, the money should be part of a well-balanced investment portfolio, Amter said.
“You might have money in stocks, emerging markets, etc.,” Amter said. “Equities, of course, have their own risk and rewards. I would see this more as an alternative to bonds.”
The financial goal of his fund is to provide investors with both capital preservation and regular monthly income payments generated by its diverse loan portfolio.
Not only is Amter familiar with the borrowers and the property he lends against, but he also personally knows all of his investors.
“We get some investors from wealth management advisers,” Amter said. “In those cases, we know the advisers very well.Otherwise, we know all of our investors.”
See the Colorado Real Estate Journal for the original article.