Where Have All the Lenders Gone?

Almost every major bank had, or will have, massive losses resulting in write-downs of historic proportions. By the end of 2007, the credit markets all but shut down for new real estate projects and investments.

This national problem has been exacerbated in states such as Florida due to massive overbuilding in the residential housing market. Add to that the ripple effects from the halt on new construction that has forced some industry-related businesses to lay off workers, or shut down completely in some cases. Furthermore, rising gas prices and the devaluation of the dollar are resulting in one of the tightest credit markets we have seen in a long time.

Many are now asking whether the situation will drag out, get worse or improve—and if it will improve, when? But speculating when the markets will turn around is foolish. A better approach is to find out what financing vehicles are available in the market now, rather than waiting in paralysis for a rebound.

One viable alternative is "bridge lending," a business that was nearly dormant during the past seven years. A bridge loan is used to help bridge the developer or real estate owner over to a time when rates will be more affordable.

Time is the key element in any real estate investment transaction. At this point, we do not know how long it will take for the lending market to stabilize, so bridge lenders are working with real estate owners and developers to bridge these projects out from a range of two to five years. Depending on the nature of the loan, bridge loans cost about 20% annually, and more in some cases.

Why are these bridge loans becoming more common in today's commercial real estate sector? Lenders offering bridge loans are sophisticated enough to understand, and willing to take, the associated risks for the price they are charging.

Bridge lenders consider the track record of the owner or developer and how loan applicants have handled problems in the past, in good and bad times. These lenders are not simply underwriting the specific project they are going to bridge; they are also putting their faith into the people borrowing from them. They could be a good source for money until the market stabilizes.

The views expressed here are those of the author and not of Real Estate Media or its publications.

Seth Werner is chairman and CEO of Cypress Creek Capital Inc. in Fort Lauderdale, FL. He can be reached at swerner@cypresscreekcapital.com.