Denver Developers Tap Life Insurance And Family Offices For Capital Amid Interest Rate Uncertainty

There's little relief in sight from high interest rates and cranked-up lending standards at regional banks that traditionally serve as the main source of capital for the commercial real estate community. So developers in Denver are increasingly turning to less conventional funding sources to close deals.

Life insurance companies and family offices are among the top choices for capital to keep project pipelines flowing when a sizable pile of general economic concerns make more traditional forms of debt unattractive. 

These types of lenders are generally not very active in commercial real estate because their debt is often more expensive. However, that is less frequently the case as traditional lenders have tightened their purse strings and added more lending restrictions after the run on Silicon Valley Bank, and with the overall health of the U.S. economy in doubt, according to Four Points Funding managing partner Chris Montgomery. 

“The biggest risk that we’re all facing right now is interest rates,” Montgomery told Bisnow. “Anything you can do to reduce your exposure to that is the most important thing.” 

One issue that Montgomery’s firm consistently runs into these days is lenders requiring higher loan-to-value ratios. Montgomery said two years ago, developers could easily walk into a bank with 25% to 30% of a project’s costs covered and the bank would finance the rest. Nowadays, banks are looking to lend at 55% to 60% LTV, meaning developers need to show they can cover between 40% and 45% of a project’s costs to qualify for financing. 

For some developers, this requirement means they are dipping into their contingency funds or savings to bring more cash to the table. Other developers are leaving their funding rounds open longer in hopes of raising more equity or are leveraging bridge financing to get across the finish line, Montgomery said.  

Banks are also attaching additional loan covenants to their offers, Montgomery said. These covenants are independent agreements struck between a lender and borrower that place certain conditions on construction loans. Montgomery said his firm has been asked by multiple banks to set aside between 10% and 20% of their loan as a deposit. Even though that money might accrue a 4% interest rate right now, Montgomery said the funds are also required to be kept in the account for a certain amount of time before his firm can use them for construction. 

These additional lending restrictions are one reason Denver’s multifamily construction pipeline is expected to moderate over the next several years, according to CBRE’s latest multifamily report. And this slowdown is likely to bleed over into other asset classes like industrial and retail, CBRE’s data shows.

Typically, a drop in activity would cause construction material costs to decline. Instead, they have increased by 6.5% over the last two years, data from the Federal Reserve Bank of St. Louis shows, which has caused many developers to feel “squeezed from both sides,” Montgomery said. 

To keep capital flowing, Four Points was able to secure a line of credit from a family office. Four Points then traded that line of credit with some banks for more favorable loan covenants and as a pseudo-bridge financing option in certain cases. 

“Using all that credit means I'm making less profit as the developer, and possibly even for our investors, because it's more expensive than borrowing chiefly,” Montgomery said. “So figuring out a line of credit in advance is just incredibly important.” 

Another source of funding some developers are tapping into is life insurance debt. KeyBank Vice President Brian Caudel told Bisnow that life insurers are becoming more active in the commercial loan space because private equity and federal lenders like Freddie Mac and Fannie Mae are not as active as they have been in years past. This leaves a void in the debt market that needs to be filled, he said. 

Freddie Mac said in its second-quarter financial report that it expects its total loan originations to decline 17% year-over-year by the end of 2023. At the same time, Fannie Mae financed just 139,000 multifamily units in the second quarter, down by about 12.5% from Q2 2022. 

“People are just marketing deals more broadly, and making sure that they're going out to every possible party that could be interested,” Caudel said. 

Aegon is one insurance company that has become more active in construction lending in Colorado. Company spokesperson Richard Mackillican told Bisnow in an email that Aegon is focusing on build-to-core construction to permanent loans. Build-to-core is a term used to describe an investing strategy where a developer builds and then holds a building for a long period of time. 

The company also chose Denver because “the opportunity provides us access to a high-quality industrial project with top tier sponsorship in a location we feel has long term desirability and durability.” 

Hines’ new Denver project, Quantum 56, is among those leveraging life insurance debt. Quantum 56 is a 838K SF Class-A industrial park being built in north Denver that is scheduled to be delivered in Q2 2024. Hines hired Essex Financial Group to find financing and settled on one of the company’s partner life insurance companies after looking at more than 100 lenders, according to a press release. 

“Given the irreplaceable infill location, Quantum 56 is a project Hines is proud to develop and own for the long term, and therefore the current economic conditions aren’t necessarily deterrents for us in executing on our business plan,” Hines Director Courtney Schneider told CommercialSearch.