Geir Watland, Managing Director, Private Capital Markets for Broadmark Private REIT, discusses why a private fund can be a viable investment during the pandemic and beyond, as well as how other sources of financing have fared as a result of COVID-19 in Part II our first-ever Q&A feature.
1. Why do borrowers choose your financing when your rates and fees tend to be higher?
There are several reasons. One is that many of our borrowers do not have access to conventional credit markets if they are asset rich but lack cash flow. They also may not want to go to a bank because banks take much longer to close a loan. They see that our high velocity, higher-cost debt is the optimal solution for them. Additionally, we’re very reliable; when our borrowers put in for a construction draw, we typically have that money available within 24-48 hours. We have a protocol on a project and when we receive a draw request, we send a third-party inspector out there to examine progress. Our borrowers are paying for velocity and reliability, and we’re not competing with banks on price. Another reason we’re an ideal partner is the ability to avoid finding an equity partner, who would typically take a coupon, half of your profits, and may meddle in your business plan. Hard money lending exists in its own ecosystem, and it’s not something that’s related to the 10-year treasury. It exists in its 12% interest, 3.5-point world, and has for decades, and we think that will continue. The fact that 70 percent of our business is from repeat borrowers speaks volumes. We have become the “bank” for these types of borrowers.
2. Who are your competitors if not banks?
The market for hard-money lending is very fragmented. There are few institutional lenders that make small-balance construction loans. Many of our competitors are mom-and-pop shops that have $1 to $2 million to lend, and once they do they’re tapped out and can’t fund the next loan. Borrowers like us because we have available capital, a nuance that puts us in a favorable position particularly in this environment. We also have the infrastructure necessary to service construction loans efficiently. We act as a construction bank, where others simply fund a loan and tell their borrowers “pay us back when you’re done.” We’re constantly touching the loans and the borrowers, which serves as a risk mitigant.
3. What has happened to leveraged lenders in the RE lending markets?
Excess leverage has knocked out some of our competitors, or put them on their heels. What you saw several months ago were lenders who had their lines of credit pulled, as often happens during times of distress, including during the 2008 recession. We were able to stay in business and viable because we have no leverage. Competitors rely on credit facilities and when they went away, they were unable to service their borrowers. We have a rock-solid, unlevered balance sheet with ample cash, which is a huge competitive advantage in this market when many others have been knocked out of contention.
