Bank Regulations May Increase Competition

LOS ANGELES—Increased banking regulations could potentially increase market competition, particularly for private and balance sheet lenders. When banks are required to hold higher capital ratios, these other lenders have more room to compete in the market. We sat down with Calmwater Capital portfolio manager Larry Grantham to exclusively talk about the impact banking regulations have on the industry. During the conversation, Grantham also gives us insight into the company's unique investment strategy, which is on track to deploy $500 million in capital this year—an impressive feat considering the company just spun out from under the wing of Karlin Real Estate. Here, Grantham talks about banking regulations, his investment strategy and why the cheapest capital isn't always the key to success.

GlobeSt.com: Do you think that banks will be more or less regulated in the next few years?

Larry Grantham: I am always careful to opine (even more careful with allocating capital) on which way our lenders in Washington will sway, but I think given the public and political vitriol that banks will continue to face increasing regulation. Banks and Wall Street in general continue to be easy targets for politicians. 

GlobeSt.com: How and why do these regulations actually increase competition among alternative capital sources?

Grantham: Simply put, increased regulation and, more importantly, higher required capital ratios force banks to hold more capital reserves, thereby having less capital to lend. While there is much debate on the specific correlations and exact impact, I think it's safe to assume increased banking regulations have materially impacted the commercial bank lending environment. These changes have allowed smaller non-regulated private and balance sheet lenders to gain market share. 

GlobeSt.com: You have a very interesting investment strategy. Tell us about the types of properties and deals that you look for, and why having the “cheapest capital” isn't the key to success.

Grantham: Our bridge debt is essentially a tool for borrowers to solve a challenge on transitional properties. This challenge might be a quick close (two to four weeks), rehabilitation of a property, lease-up play or perhaps just an aspect of a property, which is misunderstood by traditional lenders. Often, certainty of close is more critical than the last 100 basis points of debt cost when a borrower is purchasing a transitional asset.   Cost of capital is irrelevant if a sponsor fails to execute on their acquisition. Our borrowers typically refinance us within one to two years with cheaper debt. 

GlobeSt.com: You have experienced pretty substantial success very quickly. Do you attribute this—in part—to the banking regulatory environment?

Grantham: Of course we have benefited from the volatility in the economy and evolving general banking situation. Some borrowers are still feeling burnt by banks from the downturn. Banks, like most other real estate lenders, have adapted their underwriting and investment standards. We will never truly directly compete with banks on stabilized properties, but there is capacity for different types of debt with varying structures for unique real estate situations. 

GlobeSt.com: Aside from banks, what other capital sources are the major competitive sources in the market, and how do you stay competitive with those sources?

Grantham:We are aggressively competing with regional private lenders and national balance sheet lenders. It seems like we are seeing the launch of new real estate debt platforms every month. The newest trend is real estate equity funds launching debt platforms.