The top executive discussed the major changes happening in the CRE lending market and shared with CPE his long-term outlook.
Ladera Ranch, Calif.—Tightening regulations and stricter standards imposed by banks have boosted the alternative lending market, creating opportunities for investors seeking to provide bridge loans, for example. Money360, a California-based direct lender founded in 2010, recently exceeded its $100 million mark in closed commercial real estate loans.
Evan Gentry, founder & CEO of Money360, spoke with CPE about recent changes in the CRE lending market and how this is impacting his company’s long-term goals.
CPE: Could you tell us how the lending market (particularly for CRE) has changed since Money360’s founding in 2010?
Evan Gentry: I founded Money360 as I saw opportunities developing in the market to make CRE bridge loans. At the time, I was still very active running G8 Capital, where we were acquiring distressed CRE loans from banks and loan servicing companies. We were very busy with G8 Capital’s acquisition through 2014. It was really about two years ago that we started ramping up Money360. I have been in real estate lending my entire career, whether I was making new loans or buying distressed loans during the recession.
As we all know, this market experiences cycles. These cycles have a very big impact on the overall business. There have been a lot of opportunities to acquire CRE properties at attractive prices and to make attractive CRE loans starting around 2011 to 2012. Many properties have come through foreclosures or distressed sales during the recession, providing an opportunity for new owners to get into the properties at a lower cost basis. This has created tremendous upside opportunities for these property owners and those lending against these properties.
CPE: Are investors now more open to getting involved in the lending business?
Gentry: As the values have continued to climb, more CRE investors are choosing to strategically participate in the debt side of the transaction. We believe that participating in the debt side provides the most attractive risk/return in this current part of the real estate cycle. We are not predicting a crash like we saw in 2008 because the fundamentals of the market are much stronger now than they were in 2008. In particular, properties are not nearly as over-leveraged as they were in 2008, which drove much of the crash. However, we are clearly going on about seven years of property value increases, and that will not continue forever.
On the debt side of the equation, our risk is insulated by the equity investors and sponsors who bear first-dollar loss in the event of property devaluation. We are not the only group that sees the value in providing debt in this current market and have witnessed a significant increase in competition over the past year, which is also driving pricing/rates down—something that is positive for property owners/sponsors.
CPE: The shrinking CMBS market is fueling opportunities for alternative lending sources such as Money360. What types of lenders are stepping in to fill the gap?
Gentry: The shrinking CMBS market is definitely fueling new opportunities. This includes lenders stepping in to fill this gap through investments in hedge funds, private funds and marketplace lenders. Hedge funds and other institutional funds are moving very quickly into this space. Many are doing so directly, while others are providing the funds and backing lenders that are active in this space. There are also many private funds, both large and small, that are coming into this space. These private funds range from institutional to private funds backed by large family offices. Although not as large as the hedge funds and private funds, marketplace lenders such as Money360 are also growing very quickly and beginning to acquire market share.
CPE: Specifically, how does Money360 pursue deals? Could you give us a few examples of recently closed deals?
Gentry: Money360 pursues lending opportunities primarily through our regional business development officers (BDOs) that cover the primary regions in the country. These BDOs generally have 20 to 30 years of experience in the industry and draw upon their deep relationships within the broker community. The large majority of our loans come through CRE loan brokers.
Some recent Money360 transactions include an $8.3 million bridge loan to refinance a maturing CMBS loan on an anchored 206,357-square-foot shopping center in Jacksonville, Ill.; $3.2 million in bridge financing for the acquisition of a 70-unit apartment complex in Tucson, Ariz.; a $1.9 million cash-out permanent financing transaction for a single-tenant retail building in Dayton, Ohio, currently occupied by a Panera Bread restaurant; and a $1.9 million bridge loan to renovate a 67-room boutique hotel in Aurora, Ohio.
CPE: How do you think the lending market will change in the coming years?
Gentry: There is one thing you can count on if participating in real estate or real estate lending, and that is change. Although I don’t predict a crash, it would seem reasonable that we reach the peak of the current market expansion within the next year or two. However, based on the low leverage costs, significant capital coming in from overseas and investors generally accepting lower cap rates and return hurdles because they lack compelling alternatives, I wouldn’t be surprised if values bounce around at their current levels for several years before we see any meaningful downturn. My comments are on a general and national level, but of course individual markets are unique and will vary according to their local economic factors.
CPE: What are Money360’s long-term goals?
Gentry: At Money360, we believe that there will continue to be significant opportunity in the CRE lending space, especially driven by the reiteration of CMBS lenders and the pull-back by national and regional banks due to increasing regulations. We anticipate funding $250 million in the coming 12 months and getting to $1 billion or more in annual loan fundings within two to three years.
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