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High-yield lenders face new challenges in slowdowns.

Most industry leaders agree that 1999 and the first half of 2000 were as good as it gets for real estate. So what do the slowing U.S. and world economies, declining stock prices, increased cost of oil and rising interest rates mean for this industry? Logic dictates that these leading indicators foreshadow a slowdown.

Because the real estate business is not a leading indicator, it is nearly impossible to predict how much of a deceleration we in the industry will experience by looking at our business. At SWH Funding, we believe that real estate values have peaked and that we will not see dramatically rising rental rates or increased tenant demands in any sector over the next 12 months.

However, we do not foresee a downturn anywhere near the magnitude of the late 1980s to early 1990s. The real estate industry has been far too disciplined during the past decade for history to repeat itself. We do anticipate, however, a growing lack of liquidity. As a result, lending criteria will tighten up, and the process will become slower.

For high-yield lenders like SWH Funding, which provide commercial mortgage loans when conventional financing is not an option, these factors will result in increased opportunity. As liquidity from traditional sources dries up, owners and investors will turn to high-yield financing organizations as viable sources for capital.

At the same time, we expect a shift in the type of loans we finance in the coming months. Traditionally, SWH Funding provides short-term bridge loan for acquisitions, refinancings, turnaround/work-out situations, foreclosures and bankruptcies. Today, we are seeing an increase in mezzanine opportunities, which are based on the long-term cash flow characteristics of the borrower, as well as possible equity loans. We are especially interested in well-positioned, leased assets because they have very little downside in an uncertain market.

For example, SWH Funding is in the process of quoting an equity investment in a manufacturing and warehouse building that is fully-leased to credit tenants. There will be attractive, long-term debt on the property. We can offer the lion's share of the cash required with the confidence of very high return from the credit tenants.

While SWH Funding will continue to provide our traditional high-rate bridge loans if we can fit a deal into the capital structure, we anticipate that many of our upcoming transactions will involve this type of participating equity. While nobody can predict with certainty what the coming months will bring for real estate, we do know that until this cyclical industry finds itself on the upside again, high-yield lenders will play an expanded role in helping owners and developers successfully move forward.

SWH Funding structures, funds and closes loans from $2 million to $50 million throughout the United States. With more than 75 years of combined experience in the real estate and lending businesses, the firm's professionals possess the knowledge and expertise to quickly determine the "real value" of proposed and existing commercial properties, and to critically evaluate the long-term value of each. Originated through a nationwide network of brokers and bankers, many of these loans are complicated, problematic and require prompt funding.
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Title Annotation:SWH Funding
Publication:Real Estate Weekly
Article Type:Brief Article
Geographic Code:1USA
Date:Dec 13, 2000
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