Private Equity, Non-bank Lenders Stepping Up on Commercial Real Estate Lending

By Dan Smith, Partner, Smith Pauley

As an attorney who has practiced in commercial real estate finance for many decades, I have seen many trends in real estate lending. I’m now seeing another significant shift in the lending landscape. Non-bank lenders have always been with us, from life companies to commercial mortgage-backed securities to private-equity funds to hard-money lenders, with both mortgage-backed and equity-backed mezzanine lending. But traditional lending by commercial banks has been the mainstay.

This has started to change, at least for now. Nothing is permanent. Several factors have contributed to commercial banks stepping back, leading to a noticeable retreat from the sector.

Why Are Commercial Banks Pulling Back?

Why the retreat of commercial banks from real estate lending? One is that banks have a lot of loans out there at low interest rates, and their capital is tied up. Deposits are down. This restricts them from both a regulatory (Basel III and Dodd-Frank) and practical point of view.  They can have too high a concentration in real estate and also no money to lend. 

At the same time there is increasing competition, risk of defaults, and a shifting economic landscape, exacerbated by the COVID-19 pandemic, that have added to banks' wariness in extending real estate loans.

These changes have not stifled demand. I sometimes say, “Maturity dates happen to good people.” When you must refinance you have to go somewhere. Property owners seeking refinancing options are now turning to alternative funding sources. A significant portion of this finance void is being filled by private equity funds, either being created or expanded, in response to this need.

The Rise of Private Equity in Real Estate Lending

Given their flexibility, private equity funds have the capacity to provide bespoke financial solutions tailored to borrowers' needs, making them an increasingly popular choice for real estate financing. Private equity real estate lending is really nothing more than a business putting together a large quantity of capital and spinning up an organization that is capable of sourcing, closing and servicing loans.

Private equity funds operate outside the regulatory constraints faced by commercial banks, providing them with greater flexibility in structuring loans, including mezzanine lending. This latitude enables them to fund properties that banks might consider risky, thereby filling a crucial gap in the market.

Implications and Opportunities for Property Owners

For property owners, the shift towards non-bank lenders can be a beneficial development. The flexibility and adaptability of private equity funds mean that property owners have more options to navigate the challenging financial landscape. Owners can access funds that are tailored to their specific needs, rather than being boxed into the restrictive terms often imposed by commercial banks.

The rise of private equity in real estate lending also means that property owners can access capital more quickly. Without the regulatory red tape that commercial banks face, private equity lenders can often expedite loan approvals and fund transactions at a faster pace.

However, this shift also requires a keen understanding of the private equity landscape and the associated legal implications. It's essential for property owners to be aware of the potential complexities and risks associated with private equity lending, such as higher interest rates, stricter covenants, and the possibility of losing control over the property in case of defaults.

Conclusion

The retreat of commercial banks from real estate lending has undoubtedly stirred the pot in the financial sector. However, with change comes opportunity. Private equity funds have risen to the occasion, demonstrating their value in providing alternative financing options for commercial real estate. We represent private equity funds as well as owners looking for funds, so we know the game. From here forward, owners need to cast a wider net when they need financing. You may want to start with us, just in order to understand what is out there. Contact us today at 402-392-0101.

Dan Smith is a partner at Smith Pauley. He concentrates his practice on the areas of commercial real estate and commercial real estate financing, representing primarily lenders, but also borrowers, owners, landlords, tenants, developers, managers and investors in all areas and stages of commercial real estate development and financing. He represents clients in more than $500 million in real estate transactions per year. Dan is a Fellow in the American College of Real Estate Lawyers, which recognizes national preeminence in the practice of real estate law.

His career-long interest in legal technology has made him a thought leader and frequent lecturer across the United States, having presented to the American College of Real Estate Lawyers, American Law Institute, the American Bar Association and Microsoft. For these reasons, he and the Smith Pauley team can deliver innovative client solutions that systematize, automate, and streamline transactions.