This week's guest: Ronald Levine, Senior Managing Director, Meridian Capital Group

0:00 Speaker 1 Good morning. This is Mike Stola for the Stolear real Estate Report on the CATS round Table. So what’s happening in the availability of financing for real estate during these interesting times? The rates, the T bill rates are down eighty basis points over the past couple of months, But there are difficulties. Everybody hears about New York Community Bank,

0:20 Flagstar Bank, and the question is are there other banks in difficulties? And the other matter over there is who’s providing financing in this times? Are they new players? Where do you have the opportunity? So this morning, as I said, I have Ronnie Levine who is the senior managing director at Meridian Capital Group, and he is a leader truly

0:43 in understanding of what’s going on. So is there money there?

0:47 Speaker 2 Hey, Michael, nice to see you.

0:50 Speaker 3 Yeah, there’s always money in the system. The question is really yeah.

0:56 Speaker 2 Yeah, I’m sorry, there’s always money in the system. Really, the question right now now is the cost of capital.

1:02 Speaker 3 And you know, with the amount of loans that are in the system right now that can’t be refinanced. I think that’s the biggest issue facing the market right now is not the availability of capital, but it’s just the leverage points that can be achieved, and the cost of that capital makes refinancing a lot of existing loans very challenging.

1:20 Speaker 1 So how are these people only through refinance their projects?

1:24 Speaker 3 That is That’s an issue that we’re contending with on a daily basis. A lot of these deals require significant infusions of cash. The refinance proceeds are coming in significantly less than the loan balances when they mature, So you’re either going to have to raise preferred equity, or you’re going to have to get some kind of subordinate debt

1:46 form of mezzanine capital.

1:48 Speaker 1 You’re gonna have to.

1:49 Speaker 3 Bring some more equity to the table, or you’re going to have to cut a workout deal with the bank.

1:54 Speaker 2 I mean, those are really the only options.

1:55 Speaker 1 There are banks we already doing working out deals.

2:00 Speaker 3 We’ve seen some workouts from some banks. We’ve also seen some banks quietly selling distress note positions. So there’s a combination of things going on.

2:09 Speaker 2 It really depends on you know.

2:12 Speaker 3 I think that the simple rule with a workout with the bank is they’re generally willing to play ball with a barber that is willing to invest fresh capital into the asset. So if the Barber’s willing to kind of invest back into the deal. You’ll generally find more receptivity from the bank to.

2:29 Speaker 1 Work with them. And what about deals that don’t make sense? Are they selling them? Are they banks selling to investors and other people?

2:37 Speaker 3 Yeah, I mean the banks are quietly selling these notes on a one off basis. Sometimes they’ll engage a broker and list an entire portfolio for sale. You see a combination of those things. But certainly, you know that’s why you know they when these loans go into maturity default, the you know the rates, you know, you start clicking

2:59 it at the vault rate.

3:00 Speaker 2 That’s meaningful, and there are.

3:02 Speaker 3 Investors that will buy these notes at a at a discount and try to get through the asset.

3:06 Speaker 1 Now, with regard to new players in town, are there any banks? I had read the other day that Axios and Huntington Bank are been pretty active as a new lender.

3:17 Speaker 2 Yeah, I mean there’s always new entrance into the market.

3:19 Speaker 3 I think what we’re seeing today with the banks is that you know, to get them to extend credit and real estate, the majority of the banks are looking for a relationship. So what that means is they’re requiring deposits, and so you know, some banks are requiring if you’re going to borrow, you know, ten million dollars they want

3:38 to they want sometimes up to two million dollars in deposits, So twenty percent of the loan amount some banks are looking for. Yeah, look, there’s definitely new players in the market, but not enough to replace the you know, the signatures in New York community banks that were the you know, the major providers of liquidity in the New York market.

3:59 Speaker 1 You know.

3:59 Speaker 3 But what we have seen is also the CMBs market, which is really the securitized or Wall Street type lenders stepping up and providing some liquidity in the rent regulated space, which is nice to see. So we’ve done some you know, rent stabilized portfolios and buildings with with what i’ll call you know, securitization or CMBs.

4:20 Speaker 1 Loans ed wide pricing.

4:22 Speaker 2 You know, look, pricing is over the index.

4:24 Speaker 3 Generally it’s either five or ten year loans, and you know, spreads range from you know, call it in the you know two hundreds low to mid two hundreds. It depends on the leverage point. But but there’s you know, those are fixed rate loans. They get securitized and they’re you know, they’re generally being more aggressive on proceeds than the banks

4:46 right now.

4:46 Speaker 1 A number of months ago, you put together a large syndication of the loan. How long did it take? And tell me a little bit about the project.

4:55 Speaker 3 Sure, I think you’re referring to a large ground of construction deal we did in Coney Island. It was four hundred and ninety nine residential units. Do we put together a syndicate of five banks for a two hundred and fifty two million dollar loan And it took probably from start to finish eight months to put that bank group together.

5:17 Very challenging, and I think even I think that would that that dynamic persist today. I think it’s very challenging the banks. Their hold limits, what they would want to hold on a on a loan has come down, so they generally want to hold no more than you know, call it fifty million dollars on.

5:34 Speaker 2 The on the high end on a construction loan.

5:36 Speaker 3 So, you know, we’ve been looking and doing more loans with life insurance companies and debt funds. I think there’s more appetite for larger tickets than you’ll find with the regional banks.

5:47 Speaker 1 So let’s talk about life insurance companies. Have they become much more active.

5:52 Speaker 3 You know, look, come the beginning of the year, they get their fresh allocations. So you do see in the first quarter. You know, at the end of last year they had slowed down. You know, we’re getting quotes all the time from life insurance companies.

6:03 Speaker 2 They are active.

6:05 Speaker 1 What type of leverage?

6:06 Speaker 3 And you know, life insurance companies have never been known for higher leverage. They’re generally in that call it, you know, fifty five sixty five percent leverage range. I mean maybe you get them up to seventy percent on a multi family deal. In construction, you know, they generally will provide an a note and you’ll you’ll marry them up with

6:25 a mezzanine lender or a preferred equity provider to get the leverage higher. But they’re generally in the fifty percent loan to cost context.

6:33 Speaker 1 What about the debt funds who have been active, Yeah.

6:36 Speaker 3 The debt funds have been providing a lot of liquidity in the construction market. We see them go up on leverage up into definitely into the seventy five you know, seventy seventy five, even sometimes pushing eighty percent loan to cost leverage. You know, but when you think about that type of the loan, really what’s happening is they’re going

6:54 out and they’re going to borrow an a note from somebody from a life insurance company or from a Madison or an Axos or you know, one of those type of players, and ultimately they’re ending up with a subordinate piece.

7:06 So it’s just a way to originate subordinate capital and reverse.

7:10 Speaker 1 But what about condominium loads?

7:13 Speaker 3 Yeah, look, I mean I think we’re going to see more condominium loans as the four to twenty one A went away and people really the viability of building rentals on a lot of land and the city doesn’t work.

7:22 So we’re seeing people pivot towards condo plans. You know, there’s definitely liquidity for condos. It’s just a question of can you make the math work on a condo deal. The lenders are going to want to you know, they’re they’re going to want to be you know, no more than generally sixty percent of loan to net sell out,

7:40 So you know, you’re going to have to look at what price points people are projecting. I think lenders generally want to stay away from the.

7:48 Speaker 2 The very large, super high end expensive units.

7:51 Speaker 3 They want the kind of more you know, in that call it two to five million dollar range where it’s a little bit more liquid and they move a little bit faster.

8:00 Speaker 1 What about land loans.

8:02 Speaker 3 Land loans are challenging. You know, most banks don’t want to make them. If they do make them, they’re generally full recourse. The debt funds will make land loans. But you know, when you look at the cost of carry on those land loans, we’re seeing a lot of people buying land all equity if they if they have that

8:21 kind of a checkbook. If they don’t, they’ll have to you know, bake the cost of the capital as it, you know, bake the cost of interest and carry into their performance.

8:30 Speaker 2 See if they can pencil the deal. But it’s you.

8:32 Speaker 3 Know, right now, land is generally lower leverage and it’s expensive debt.

8:36 Speaker 1 What about financing for hotels and retail?

8:41 Speaker 3 Well, I’ll start with retail because it’s an easier answer. I mean, I think retail is actually, uh, you know, a bright spot right now. I think that you know, retail is doing well on a on a relative basis.

8:55 I think we’ve kind of come out of the COVID doom and gloom and sales seem to be pretty strong. Leasing velocity seems good.

9:03 Speaker 2 It’s like anything else. You got to look at the rents.

9:05 Speaker 3 There’s still some legacy rents that are above market that were signed, you know, pre COVID, and in today’s market when you look at them, if that tenant were to go out, you’re not going to be able to replace that rent. So, assuming you don’t have an issue with above market rents, there’s plenty of liquidity from banks and

9:24 CNBS and life companies for quality retail not as relevant in this market, but you know, grocery anchored retail centers or everybody’s lives.

9:33 Speaker 1 Okay, what about hospitality.

9:35 Speaker 2 Hospitality is challenging in New York.

9:37 Speaker 3 I think, you know, union payroll issues are still something focused on. Real estate taxes continue to be challenging. But you know, a hotel deal kind of in the you know what i’ll call Central Park West area, and we had plenty of bids. CNBS is an active player in that arena, as are the debt funds. I think the

10:01 banks will lend on hotels, but it’s going to be a relationship loan for somebody that they have or you know that they have a track record with, but we’re getting them done within the conduit space.

10:12 Speaker 1 So when I was on TV, I used to have my Crystal Apple and I would rub it and I would ask, Crystal Apple, what’s going to be How do you look for the end of twenty twenty four and twenty twenty five.

10:26 Speaker 3 You know, look, that’s a great question. I think there’s a few cliches that are pretty prominent in the market right now, and it’s higher for longer, right which is referring to kind of the you know, the reality that rates are not coming down anytime soon, and you know this hope that the FED is going to lower rates.

10:44 You know, inflation keeps popping back up, and I think the market sentiment is that the amount of cuts and the severity of cuts to rates is not what people are hoping for.

10:55 Speaker 2 So everyone’s monitoring that.

10:57 Speaker 3 And I think the other cliche that you keep hearing a lot survived till twenty five, so you know, I think hopefully towards the second part of this year, you’ll start to see rates come down, you know, hopefully in that fifty to seventy five bases point context, and that I’ll give some breathing room. I don’t think that that’s

11:13 going to cure all the problems in the market, but it certainly take a little bit of pressure off.

11:17 Speaker 1 I’d like to thank Ronnie Levine for being here and I’ll see you next week. Thanks Michael