|Hard Money Lenders Predicting More Business This Year
BY NORA CALEY
Commercial Mortgage Insight
Reprinted with permission from the March 2001 Issue
Hard money lending has a tarnished reputation. Lenders charge higher interest rates than traditional lenders. Borrowers typically cannot secure conventional financing. And some lenders have been known to back out of the deal at the last minute. That’s why some hard moneylenders prefer to call themselves bridge lenders. “Our idea is to bridge into a better situation rather than just bail out somebody and take the property,” says Daniel Edrei, director of Meecorp Capital Markets LLC, in Fort Lee, N.J. “ We are not the lend-to-own program. We all have consciences.” Hard money loans are attractive to the borrower with less-than-stellar credit rating. And as the economy changes, so does the borrower. “The diversity in the kind of loans we see has greatly expanded. I believe a lot of the banks and institutions have tight-ended up their criteria for lending. There are some really solid transactions, which they’re not lending on now, so as a result, there is a hole in the market. The bridge product is a perfect fit for that hole,” says Edrei.
Edrei agrees that hard money appeals to borrowers in a hurry. “They can close in three or four weeks. That’s another reason you see many times a borrower who is eligible for permanent financing but doesn’t have time to take advantage of the discount.”
Edrei quotes 12% to 15% interest rates, plus fees. “Anytime we invest in bridge loans, traditionally we’re looking at 18 or 20 percent return total. We’re not talking cheap money,” he says. He adds that some borrowers would rather pay the high interest rates than find a partner who would want 70% of the property.
Meecorp pays more attention to the property than to the borrower. “We can work with borrowers that are in bankruptcy, so long as we know we’re financing a good property,” Edrei explains. “When we appraise property, we want to know what it’s worth now. If we’re loaning 50 or 60 percent LTV, you can be reasonably certain nothing will affect the value of the property that much if the loan will fail.”
The lender protects itself by developing an exit strategy. The property must be pre-leased, or the borrower should have letters of interest from purchasers. Or it can be a property such as a hotel or office building that will presumably have cash flow within the next year or two. “Ideally, they would all be cash flowing properties that are doing wonderfully and could be financed anywhere, but rarely does it work out that way,” says Edrei.
Edrei says Meecorp also has investors, plus Meecorp’s own funds. So Meecorp doesn’t have a maximum loan limit either. “You see so many pie in the sky. Occasionally we run into one that is real. Certainly we’re looking for deals of substance. When you go to gargantuan size loans, there are much fewer real transactions. I’m working on one now for $400 million. It looks like a very viable transaction,” says Edrei.
Brokers In Important Role
Brokers play the important roles of sales people, marketers and prequalifying professionals. The brokers find the customers and determine whether the borrower fits the lender’s criteria. “Probably 90 percent of our business comes from brokers. They do a lot of pre-qualifying for us. It makes my life easier,” says Edrei.
Edrei thinks the future is bright for hard moneylenders. “The one thing would say with the economy- obviously we’re going into a recession- and with all the amalgamation of different banks, the criteria is going to tighten up more and more. Yield spreads are increasing. Traditionally when this happens, there are more bridge loans, and more appetite for bridge loans,” he says. “I can look forward to seeing more business.”
Daniel Edrei is a Director of the Principals Group at MEECORP CAPITAL MARKETS,
a New Jersey-based commercial real estate lender providing fast, creative funding solutions nationwide. Meecorp specializes in non-conforming transactions such as Bridge loans, Mezzanine/ Equity loans and Sale-Leasebacks (including land and construction), ranging from $1Million to $100Million and above. You can reach Daniel via email at Daniel_Edrei@Meecorp.com or by calling 201-944-9330 ext. 103.