Commercial Investment Real Estate March/April 2016 | Page 16

FINANCING
FOCUS
Are borrowers making a shift to alternative
fi nancing sources? by Brian Good
by Brian Good
Before 2008, lending decisions were generally driven by the eco-
nomics of loan volume. The priority of making money through loan
origination was hard-coded into the commercial banking culture,
as compensation was based on loan volume not loan performance.
Not surprisingly, the quality of loans in banks’ portfolios deteriorated
as risks mounted, setting the stage for the 2008 fi nancial crisis.
In the wake of the 2008 f nancial crisis,
the federal government enacted regula-
tions designed to prevent incentives based
on origination volume. T e result was a
tightening of credit and capital markets,
and a larger pool of borrowers was unable
to access loans.
As the economy recovered, the demand
for debt f nancing grew. However, due to
aforementioned regulations and bail-out
conditions, banks were either unable or
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unwilling to make many of the loans they
were making before 2008, even on low-risk
properties. Increasingly, borrowers looking
for loans couldn’t f nd them through tradi-
tional channels.
Nonbank Resources
Alternative lending has always existed in
one form or another alongside the tradi-
tional banking system. However, it’s taken
on a larger and more intriguing role over
Private Lender Advantages
Since they are generally smaller, nimbler,
and have less overhead, private lenders can
cherry-pick loans without being subject to
blanket regulations that render entire asset
classes unattractive. T is may contribute
to safer loan portfolios overall. A massive
opportunity has emerged for private bridge
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Post-Bank
Lending
the past few years as an option to address
the shortfall between borrower demand and
the supply of lendable bank funds.
In considering the key lending segments,
such as personal and small business, lever-
aged lending, commercial real estate, mort-
gage, and student loans, Goldman Sachs
estimates the aggregate of alternative loans
outstanding to be $4 trillion, compared
with $8 trillion of bank loans. From 2009 to
2014, peer-to-peer loan issuance grew sub-
stantially, from $26 million to $1.7 billion.
Loans made between individuals is nothing
new, but technology-based platforms such
as Lending Club and Prosper Marketplace
have made these types of transactions easier
than ever, which has enabled the exponential
growth of this form of lending.
Within real estate lending, nonbanks’
share of mortgage originations jumped to a
record 42 percent in 2014, up from 10 percent
in 2009. T e advancing wave of commercial
mortgage-backed securities maturities cre-
ates another opportunity for nonbank lend-
ers. Many of these CMBS loans may not be
eligible for ref nancing from banks or CMBS
due to cash f ow shortfalls. Private lenders
may be a viable and formidable option to f ll
this gap.