Commercial Investment Real Estate March/April 2017 | Page 18

INVESTMENT
A N A LYSIS
Shadow Banking
With capital tougher to obtain, alternatives are cropping up.
by Will McCabe
A
16
March | April 2017
loans, and these loans represented a larger percentage of non-
traditional debt as lenders pursued creative structures to meet
the demand for capital. Enough time has passed to observe the
risk of unsecured debt versus the relative safety of secured loans.
Securing Debt
While a personal guarantee from the borrower provides some
safety for a lender, there is no doubt that it is easier to underwrite
the value of real assets, such as real estate, equipment, or inven-
tory, as opposed to gamble on a borrower’s net worth.
Unsecured debt is exemplifi ed by a credit card. A borrower can
effectively delay repayment obligations for years until the lender
fi les a notice of default. The lender, however, is not compensated
at this point. The dispute is taken to the courts, where the judge
could potentially decide that the lender is not owed the principal
balance in full.
In contrast, foreclosing upon a real estate asset involves a notice
of default, a cure period in which the length of time depends
COMMERCIAL INVESTMENT REAL ESTATE
fter the 2008 fi nancial crisis and the ensuing Great
Recession, traditional lending sources were no longer
able to make loans that had once easily passed through
credit committee approval. As a result, the fl oodgates
opened for nontraditional lending sources, stepping into the void
left by the banks.
In 2012, commercial mortgage-backed securities issuance vol-
ume hit $48 billion, a fraction of 2007 issuance of $228 billion
and tiny compared to 2013 commercial real estate debt maturity
of $374 billion. While CMBS issuance has crept up since then,
it is nowhere near pre-2007 levels, according to the Commercial
Mortgage Report. The supply and demand imbalance has cre-
ated an incredible opportunity for nontraditional debt capital
providers.
As private lenders and nimble debt funds began to form what
is known as the shadow banking space, new challenges have
emerged pertaining to risk management, as this was uncharted
territory for regulators. Many lenders began making unsecured