In recent months we’ve blogged about how continued volatility in interest rates and uncertainty in the banking system are making traditional banks more reluctant than ever to lend for business purposes. (See Banking Crisis Highlights the Advantages of Private Lending & As Banks Tighten Their Purse Strings Due to Recent Failures, Enact Partners Continues to Lend on Projects with Solid Fundamentals.) As a result, banks are increasingly hesitant to go near anything that even has a whiff of uncertainty, such as land purchases, construction, agriculture, multi-family construction loans, or commercial real estate in general.
In fact, many banks are looking for any reason NOT to lend for business purposes. Naturally, this puts builders, developers, and commercial real estate investors looking to finance their projects in a bind.
As a private lender, Enact Partners is not averse to financing business-purpose loans. In fact, those are the only kinds of loans we finance. And we do so with confidence, relying on the borrower and the merits of each unique project, not the market or the Federal Reserve, to inform our lending decisions.
So, what are the top risks borrowers face when seeking financing through traditional banks?
The Waiting Game
When borrowers work with a bank, the underwriting process can stretch on for months. Enact Partners has seen cases of borrowers spending six months, eight months, or even longer in the “due diligence” process, only for banks to bow out of a deal at the last minute.
In today’s turbulent market, this leaves borrowers wondering if they’re going to be able to complete projects already underway or get new ones started. Enact Partners provides borrowers with the certainty of closing, typically within 7 to 45 days.
Lack of Flexibility
Nowadays, banks are increasingly resistant and unaccommodating when it comes to loan modifications or extensions. Although loan terms are agreed to at the time of closing, borrowers sometimes need more time to complete a project than expected, usually due to construction delays. Banks are generally not willing to extend or modify existing loans to give borrowers this additional time. Essentially, this means the loan must be completely re-approved.
In contrast, with a qualified borrower on a deal we like, Enact Partners is very flexible extending or modifying loan terms. As a private lender, we have greater discretion for handling these types of requests on a deal-by-deal basis rather than having to resubmit the loan to a credit committee and undergo the bureaucratic hurdles of re-approval.
Covenant Conundrum
Bank loans typically impose financial covenants that require borrowers to meet liquidity and net worth minimums. Other covenants might require borrowers to submit their tax returns, audited financials, and other documents. Failure to meet any of the covenant requirements, even temporarily, could trigger an “Event of Default.”
An example would be if a borrower’s liquidity in one quarter were to fall below the covenant threshold (generally around 10% of the loan amount). In such a scenario, even if progress on the project was going as planned, payments were on time, etc., the borrower could go into default due to the liquidity covenant.
Enact Partners evaluates each deal on its individual merits and overall performance rather than rigidly adhering to pre-set criteria. Our goal is for the project to succeed. We succeed when our borrowers succeed.
Floating in Uncertainty
For bridge and construction loans, banks generally originate loans with floating rates. Floating rates expose borrowers to market fluctuations where deals that began with seemingly favorable rates can quickly escalate.
For example, a deal originating in January 2023 with a floating rate of Prime+300 (Prime was 7.5% at the time) would have started at 10.5%. Now, with Prime currently at 8.5%, the floating rate for the loan would be at 11.5%.
Additionally, sometimes there are no caps on the floating rates to protect borrowers from severe rate spikes. That means, for a 36-month bridge loan originated in June 2020 at Prime+500 (when Prime was 3.25%) the borrower would be paying an interest rate of 13.5% today, often with no upper limit on how high the rate might go.
Financing Built for You
Until rates and lending markets stabilize, Enact Partners expects banks and institutional lenders to remain risk averse and reluctant to lend for business purposes. With reports of banks not lending or pulling out of business purpose loans at the eleventh hour, it’s risky business. Borrowers and commercial real estate investors seeking financing for a new project or hoping to complete one already underway are understandably nervous.
Enact Partners will not leave borrowers stranded. We offer borrowers a reliable, flexible, and stable alternative to banks. Despite recent trends, we continue to lend on commercial real estate projects with solid fundamentals.
Contact Us About Your Borrowing Needs
(760) 516-7776 | [email protected] | www.enactpartners.com
