Benefits of private lending - Banking & Finance

Real Estate Weekly, Jan 14, 2004 by Jeffrey Wolfer

Experts agree that 2004 will be a year of transition for real estate markets as both the development and financial sectors of the industry confront what appears to be a weak recovery characterized by slow job growth and increased debt loads at all levels of government.

This past year was marked by hesitancy on the part of investors and lenders, strong discipline by the development sector, and widespread indecision due to uncertain economic conditions. While capital was readily available for certain classes of real estate development, others found few sources willing and able to meet their needs. While some capital will continue to remain available to fund real estate ventures, the return of the stock market is likely to spark a diversion of capital to the stock market this coming year.

Despite improving economic indicators and a pickup in activity, caution and pessimism about the future remain strong. The big question for developers is where will they get the capital to fund their projects?

Looking Back to See the Future

In 2003, developers held back on new activities and showed great restraint in seeking funds for new projects. The focus was on increasing cash flow, curtailing operating costs, and developing ancillary profit centers to boost profit margins.

Private lenders were one of the few valid alternatives to conventional lenders during the economic downturn in 2003. Obtaining capital from private lenders is simpler, faster, and is more apt to be free of bureaucratic red tape in the loan process than institutional lenders or the public markets. While fees may be higher with private lenders, they take on greater risks and their actual costs are lower in the long run than giving up equity in partnerships or joint ventures.

The year ahead will still be influenced by caution on the part of traditional lenders and investors. Private lenders will remain the best source for securing fast funding for land and speculative development. Other factors, such as financial or legal duress, and bankruptcies or foreclosures, are quickly rejected by conventional banks. Private lenders, however, are ready and willing to work to resolve legal and financial obstacles and make the loans.

How Private Lenders Differ

In the past decade, the commercial real estate industry has become more competitive and part of the global marketplace. Dwindling land supply and increased regulatory oversight have also combined to make the speed of loan transactions critical to the success of many commercial real estate ventures. Many conventional lenders have yet to alter their loan processes to make them more efficient and timely.

This slow process imbued with red tape makes traditional lenders a poor choice for developers who need quick financing decisions or bridge loans to sustain their projects. A bridge loan from a private lender buys a borrower time to work out problems and meet stringent timetables. When a loan becomes "seasoned" by a private lender, borrowers can often go back to the banks at a later date and refinance with a long-term loan, or position the property for sale.

In recent months, Kennedy Funding has demonstrated its ability as a private lender to move quickly to fund major real estate developments. In November, Kennedy made an $18 million loan to Tamarack Resort in Donnelly, Idaho. Set some 90 miles north of Boise, Tamarack is the first master-planned all-season ski resort and residential community to be built in 22 years. The new resort, which will occupy 3,600 acres along the shore of Lake Cascade, is being touted as the next Sun Valley.

In another recent scenario, Kennedy issued a $1.8 million loan to enable Florida developer Carris Commercial Properties, Inc., to purchase a 74-acre site less than a mite from 1-95, which became available when a power company's plan was denied approval. Any delays in the lending process would have caused Carris to miss the opportunity to grab the property.

Private lenders are asset-based and more willing to give full consideration to the borrower's assets--including raw land--overlook past credit problems and consider potential foreclosure or debtor-in-possession financing. They also provide greater access to capital for commercial borrowers across a broad range of needs and encompassing a diverse array of scenarios. They are less influenced by cyclical market fluctuations and better able to respond to borrower needs that fall outside clearly defined parameters. In addition, private lenders provide the quick, efficient turnaround today's borrowers need to meet the time-sensitive demands of a highly competitive global market.

Kennedy Funding, based in Hackensack, New Jersey, is one of the largest private lending firms in the country. They provide commercial real estate secured loans of $1 million-$300 million in two weeks. For information, visit www.kennedyfunding.com

JEFFREY WOLFER PRESIDENT, KENNEDY FUNDING