For Frustrated Project Sponsors, Private Lending Can Be A Solution

Last year took a toll on commercial real estate, but there continue to be opportunities for savvy real estate investors who can discern diamonds in the rough — and who work with a lender that shares their vision.

In California, which faces an estimated housing shortage of nearly 1 million units, some developers were able to make new multifamily deals work in spite of economic or political headwinds. Meanwhile, some players in the state’s legal cannabis industry, which is the largest in the country, were able to close CRE deals even as the young industry continues to experience growing pains.

Many factors influence whether or not project sponsors can make deals pencil in this environment, including whether they have a lender in their corner who understands both the sponsor’s business and the market they work in.

Streit Lending’s management team says that small private lenders are uniquely positioned to help frustrated project sponsors navigate today’s challenges. This is due to their ability to get to know clients closely and to act quickly on their needs.  

“While CRE sales and activity have slowed, there are still many active buyers and developers out there who are getting frustrated or turned down by banks, and this is where we can step in,” Managing Principal Noah Streit said. “As a result of increased bank scrutiny, we are seeing more bankable borrowers who would have previously not turned to private lending as an option.”

Streit said borrowers appreciate the “certainty and speed of close” that a private lender like Streit Lending can offer, sometimes bringing deals to close in a matter of weeks rather than the months it would take with an institutional lender.

Principal Nava Streit Raziel said that, in spite of a troubled economy, her family-owned firm is seeing an increase in loan activity across all property types. This is particularly the case with construction completion loans for commercial and residential properties.

“The reason is because of Covid delays, but it is also the result of inflation in construction and labor costs,” Raziel said.

Streit Lending worked closely with one longtime client to close five land deals totaling approximately $4.5M in 2022. The resulting projects will add multiple housing units to the competitive Los Angeles market. 

“We close a few loans each year with this borrower and together have converted many single-family properties into new multifamily units in the Downtown Los Angeles area,” Raziel said. “Due to Streit’s pre-existing relationship with this borrower, we could provide terms and close quickly on their projects.”

One of these projects involved a $1.6M loan for the purchase of a 6.8K SF lot. The client plans to replace a triplex on the site with 25-bedroom student housing. 

“The borrower wanted to have all loan details squared away so that everything was ready to go once he had the demo permit,” principal Auriel Streit said. “We provided loan terms, drafted documents and had all details set up and ready to go. Once the borrower received the demo permit, we funded the loan and provided a seamless process for them.”

Auriel Streit said the close relationship a private lender can maintain with the borrower allows it to anticipate future needs and to turn on a dime if necessary.

“The relationships that we develop with our borrowers are a huge advantage to both parties because they feel comfortable calling and texting us whenever they need something or have a quick question,” he said. “We can offer flexibility on a case-by-case basis that larger institutions cannot.”

In another instance, Streit Lending helped the same LA client close on a bridge loan in two weeks to finance the purchase of a 5.2K SF single-family lot where the borrower wants to build multiple units.

“Streit has the ability to close simple transactions within two weeks,” Raziel said. “While the borrower ended up getting an extension to close escrow, we were ready to fund within the original required time frame.”

Streit Lending was able to service the loan of another client, this one in the recreational cannabis sector, with a similar level of efficiency supported by the lender’s extensive experience in this complex market. 

The $12.5M loan allowed the client to purchase a 100K SF light industrial warehouse in Downtown Los Angeles. Half of the building was leased to a cannabis cultivator, and the property also contained environmental contamination.  

“Given the complications associated with this property, the borrowers were rightfully concerned that they would not be able to find a lender that could close against a cannabis property with environmental issues,” Noah Streit said.

Because Streit Lending is not beholden to investors or fund restrictions, the firm can structure loans “very creatively,” he said. Furthermore, Streit lending was able to hold back a portion of the proceeds to be used for environmental remediation of the site.

Noah Streit said his business remains bullish on the cannabis sector in spite of a slowdown in market growth, adding that Streit Lending expects the sector will begin to stabilize in 2024.

“At the beginning of legalization in all cannabis markets, there is a huge influx of investors and frivolous spending in the sector,” he said. “However, as these markets begin to mature, the economics of cannabis begin to stabilize.”

The Streit Lending execs expect stability to begin to return to the broader CRE industry, too, by late 2023. 

“We think the first three quarters of 2023 will see turbulence as we start to see the long-term effects of the increased interest rates,” Noah Streit said. “However, we hope by the time we hit the fourth quarter, things will start to stabilize.”

Streit Lending’s advice for owners and developers to navigate the new year is simple.

“Be conservative in your valuations and your pro formas so that you’re still protected in a downside market,” Raziel said. “And keep your eyes open for opportunities.”

This article was produced in collaboration between Streit Lending and Studio B. Bisnow news staff was not involved in the production of this content.

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