Private lenders emege as main source of capital.

Private lenders and non-traditional funding sources are emerging as the main source of capital for commercial real estate loans, as investment banks pull back in the wake of market turmoil on Wall Street.

Wall Street's troubles began last summer when Asian markets collapsed. Market reaction created a capital crunch, as banks and investment firms pulled back from their aggressive lending and investors fled the market for the safety of Treasury bonds.

"At times like these, private lenders are the only viable resource for capital to fund commercial real estate deals," said Jeffrey Wolfer, president of Kennedy Funding, one of the nation's largest direct private lenders for commercial real estate. "Unlike investment banks and conventional lenders hit hard by the market's dive, private lenders have freer access to ready capital, greater freedom in funding a diversity of projects, and can respond more quickly to borrower demands."

As capital sources dried up over the past six months, deals have unraveled and developers have been left scrambling to seek funding to rescue deals and hold onto prize properties. Private lenders may be the only source to secure capital for acquisitions, land development, hotels/motels, expansions, workouts and emergency bridge loans, according to Wolfer.

"Investment banks such as Lehman Brothers, Credit Suisse First Boston and Nomura Holdings, Inc., have suffered significant losses and abandoned much of their commercial lending activities," said Wolfer. "When an aggressive player like Nomura, reportedly posts a $1.6 billion loss, investors panic and everyone begins second guessing the market. The result is nobody wants to lend, loan-to-value ratios plummet, and a lot of viable projects die on the planning table."

According to Wolfer, the pullback by Wall Street lenders has left a tremendous void that direct lenders and non-traditional funding sources will try to fill. In addition, many firms who hoped to derive cash from IPOs have curtailed those plans because of a lack of support.

Kennedy Funding, which provides loans of $1 million to $300 million, specializes in the rapid turnaround of commercial real estate loans by using an experienced in-house team of experts to perform due diligence and assess the risks of loans. While most loans close in about 14 days, three-day turnarounds are not uncommon. Kennedy has access to a network of investors and bank lines of credit that enables it to raise funds for multi-million dollar deals quickly. Its streamlined decision process and creative approach to lending eliminates the red tape that plagues some commercial lenders.

Among their recent loans include those to Kiwi International Air Lines; Heartland Amusement Park, a new amusement center built around the cartoon character Garfield the cat; General Media, Inc., the publishing empire owned by Bob Guccionne; and owners of multiple shopping malls, office buildings, industrial parks, and housing communities throughout the nation.

Kennedy Funding has also recently completed some high profile commercial loans in the international arena, including a loan for a resort hotel in St. Maarten; a $20 million project in Mijas, a popular coastal resort town on Spain's Costa del Sol; and a residential community in Mexico City, Mexico.

Henry Haskell, a senior partner with Kennedy Funding and an expert in market dynamics, said "Buyers are unlikely to get much backing from investment banks until the first quarter of 1999, after those banks have an opportunity to securitize more than $30 billion in loans still on their books and sort out their losses."

"It will be quite a while before the Wall Street firms resume lending activity anywhere near the pace they were at earlier this year and last year," Haskell said. "Investors and developers will need to be resourceful to uncover the capital they need."

"The credit crunch in commercial real estate has set off a panic reaction, and with it, a lot of negative talk and that is having a dampening effect on the market," said Wolfer. "It is interesting that the market reaction runs counter to the classic indicators of real estate performance. If you look at the statistics, market conditions are quite good. Rents are up, vacancies are down, and many markets show strong job and population growth."

"Investors and developers can find real bargains in this market, as prices go down from previous levels," added Wolfer. "Before, prices were being driven up by easy capital and competition from buyers and developers. Demand for higher equity by lenders will also narrow the field of buyers, and cut competition."

Recent negative market dynamics point to a prolonged period where conventional funding will be more and more difficult to acquire, even with the stock market's recent rise, according to Haskell. In such scenarios, direct lenders like Kennedy become one of the few resources available to business owners, developers and investors for critically needed funding, he said.

Added Wolfer, "At times like these, when access to capital is restricted, direct lenders can spell the difference between success and failure."