Private Lending Is Filling The Growing Gap Left By Traditional Lenders

More than eight years after the recession, new regulatory frameworks like Basel III are preventing banks from taking on excessive risk, continuing to amplify traditional lenders’ hesitancy to invest in new developments.

Projects in the hospitality industry have been particularly affected by the slowed growth. Developers, faced with limited options, have turned toward more eager private lenders to meet their capital goals. And with increased belt-tightening from institutions, these unconventional lenders do what traditional firms cannot: taking on varied projects, often with elevated risk, in the wake of new restrictions.

As of 2015, the banks really don’t have a choice. The stipulations of Basel III have attempted to put a stopper on economic collapse by increasing financial inflexibility. As more money goes into high volatility commercial real estate, banks must keep more capital in their reserves. Consequently, construction lending becomes less appealing.

Institutions have become picky, but this reluctance is a gain for private lenders. More willing to underwrite higher-risk hotel and residential projects, the boldness and contrarian stance of private lenders has promoted new development despite financial institutions' reluctance.

The new EVEN Hotel Miami—the first of the franchise in the Southeast—exemplifies the potential payoff. Debuting in Miami in 2018, the seven-story, 190-room hotel is geared toward wellness and healthy travel. The concept attracted Hall Structured Finance, which holds a $20M first lien construction loan on the development.

HSF president Mike Jaynes said his firm's decision to fund the hotel was helped by its prime location.

“The strength of the Miami Airport hotel market, the city’s growing economy and its status as a financial center and tourist mecca, coupled with a brand-new hotel experience emphasizing health and wellness from IHG, made this hotel a model investment for us,” he said. “Travelers to neighboring businesses will appreciate having a contemporary amenity like this hotel in such a high-traffic area near the airport, and we think this project will be very successful.”

Unlike banks, private lenders have the flexibility to support innovative concepts, especially in the hospitality industry. The new Miami hotel represents just a small piece of the varied construction loans HSF has closed in the last few months of this year, which now total $67M.

Hall Structured Finance and similar firms can’t fully replace traditional capital, at least not yet. Entering the new market, the firm predicts that increased hesitancy from institutions will only widen the gap between financing sources, leading to a possible slowdown of new developments in 2017.

HSF mitigates risk by accounting more conservatively for certain markets that are performing exceptionally well—like Florida, which is experiencing an employment boom—and by bracing for the prospect of heightened competition from new private lenders.

With an eye toward the future, HSF remains optimistic that its lending practices will continue to grow through future cycles of reduced development. The firm plans to close an additional $100M in loans by the end of the year, a sign of its continued willingness to take risks, counter to the traditional market.

To learn more about Bisnow partner Hall Structured Finance, click here.