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Funding & Alternative Lending

Funding Alternative Lending Strategies

Four Options for the Real Estate Investor by Marc Connelly With traditional lending institutions pulling back, and 4.5 million individuals, couples, and families struggling to find suitable units amid the housing shortage, investors, developers, and homebuilders across the nation are doing their part to close the gap — with the help of some surprisingly innovative financing options. Here are four options built with investors in mind: Option One PRIVATE LENDERS This option, for many real estate investors and developers, checks all the boxes — flexibility, speed, and more accessibility than traditional bank financing — with funding options to suit almost every scenario, budget, and deadline. Think hard money loans which are ideal for fix-and-flip projects, bridge loans for when it’s a race against time to sign on the dotted line, and long-term loans for those lengthy repayment periods. Private money is often used in three scenarios: when traditional financing is unavailable, for investment properties, and for time-sensitive fix-and-flip scenarios. Private lending is championed for its ability to shape the loan around the investor’s needs, not vice versa. By focusing on the property’s potential — not just the borrowers’ credit — while tailoring the terms and structures to their needs, this flexibility is what makes private lending so sought-after by investors. Yet, with this immediate access to capital and the ability to fund unconventional projects come higher interest rates and, usually, shorter repayment periods. It is a compromise that many investors choose to make, as bank institutions face a lack of equity liquidity, without enough supply to fill the demand. In 2024, $820 billion worth of commercial property loans are due to mature, with ‘at least 45% of the loans scheduled to come due in 2025, 2026 and 2027’ being behind – something that will make it even more difficult to secure a traditional loan. Here are some private funding alternatives:  »         Bridge Loans // This financing option is designed to fill short-term gaps in financing, such as for light renovation projects, until projects are stabilized or sold, or long-term financing is secured. Bridge loans allow investors to leverage equity from other projects to take advantage of opportunities quickly and compete with cash buyers.  »         Fix and Flip Loans // There short-term loans enable an investor to buy and renovate a property quickly and sell for a profit.  »         DSCR Loans // Debt Service Coverage Ratio loans are qualified based on the property’s income and its ability to carry the proposed debt. This long-term loan is used for investment properties and does not need personal income verification to qualify, retiring short term debt.  »         Ground up Construction Loans // These loans are designed to support new construction projects from the ground up incorporating land acquisition and building costs. Option Two FAMILY OFFICE FUNDING SOURCES Family Office funding has emerged as a significant alternative funding source for real estate transactions. According to a recent study by UBS Global Family Office, 78% of family offices are invested in real estate.  Aligning with the right fund could provide an investor with a great partnership for liquidity, thus enabling faster growth. Here are some ways that family offices are providing funding:  »         Direct Investment // The Family Office invests directly in a project instead of going to an intermediary such as a REIT, allowing direct control over investment decisions and asset management. Direct investment requires more internal expertise and steady deal flow to meet fund obligations, making it an ideal partner for the experienced operator seeking growth.  »         Flexible Financing // Bridge loans, construction loans, and mezzanine debt are capital structures utilized in this option. Direct equity can be aligned with debt and to also create a Preferred or JV-Hybrid approach.  »         Co-GP Investments // This type of financing allows a Family Office to lever up its capital stack, making a larger investment, while leveraging the Sponsor/ Developer expertise and infrastructure to get deals done.  »         “Programmatic Equity” // An alternative has emerged for smaller investors who need additional down payment and closing costs to close more deals. Emerging equity funds provide the capital for a share of the profit. Leveraging the Private Lender guidelines, these funds allow smaller experienced investors new access to capital to help grow their businesses. Option Three SELLER FINANCING In theory, seller financing is simple — instead of paying the property seller in full, investors pay in monthly installments, allowing them to reserve some equity to plunge into more projects, while also saving on closing costs, capital gains tax, property tax, and homeowners insurance. It is an attractive option, especially for those struggling to secure traditional financing. Yet, in practice, it is not quite as straightforward. Facing large down payments, higher interest rates, fewer regulations, and the risk of the seller not keeping up with their mortgage payments, it’s vital for investors to protect themselves both through due diligence and rigorous contracts. With that said, here are some of the many advantages:  »         Flexibility // By liaising 1-on-1 with the seller, investors can propose terms and rates that work for them.  »         Speed // Investors can expect to close within days without the red tape.  »         Unconventional Terms // Borrowers can get creative with their terms, supporting unique projects and scenarios.  »         Tax Benefits // Investors will avoid many of the usual taxes associated with purchasing — and owning — a property, namely capital gains tax.  »         Accessibility // Investors who are unable to access traditional lending options will be considered, as well as homes in disrepair that cannot be considered for mortgage purchases. Option Four BLOCKCHAIN It is easy to think of Blockchain as an opportunity for tomorrow’s investors. But what is all the fuss about — and is it really an opportunity for today’s investors? Blockchain opportunities are endless, with many nicknaming blockchain the “internet of value.”  From effortlessly converting investments into digital tokens to the way contracts can be managed, blockchain is changing the face of real estate investments — for good. Here’s how:  »         Tokenization

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A Newfound Hope

How Investors are Shifting with the Market by Amy Daniel There is an emerging excitement for investors as activity is beginning to reignite in the space. For the last few years, there was a pause in the market as rates increased, housing costs soared, and inventory remained low. But as 30-year fixed mortgage rates begin to drop, there is a newfound hope across the entire market, with rates averaging 6.46% in the first week of September, down from 7.22% in early May and a recent high of 7.79% in October 2023. This is the lowest rates have been since April 2023. While investors typically take on 5-year short term loans that recently have had lower rates than a 30-year fixed mortgage and have been much steadier, changes across the entire market have an impact on the space and investors are beginning to react. We are starting to see things loosen up and investors who sat out over the last few years are coming back, ready to play. Investor home purchases in the second quarter of 2024 were up 3% year-over-year. That means investors purchased a total of $43 billion worth of properties, according to a Redfin report. The most popular purchase for investors in Q2 was single-family homes, which comprised 69% of all investor purchases. As investors work on next steps within the every-changing market—whether it is shifting their portfolio or thinking about refinancing — there’s a lot of moving parts that they need to consider. Impact of the Market We are seeing a lot of larger investors pruning their portfolios right now, whether there is a certain area that they want to get out of, or they are looking to switch up their inventory. Lower traditional rates will have a large impact on this and should be seen as a positive for those looking to make a change in their portfolio. As investors sell off assets, simply put, they need someone to buy them. In many instances, they are selling to individual buyers who are purchasing these homes as a one-off asset. As traditional 30-year fixed rates drop, investors can sell off assets faster and make a switch. They are no longer stuck in a market with no movement and can make moves to prune their portfolio. What is the Right Move? As rates begin to shift, simultaneously, many investors have loans that were taken out during the hot pre-pandemic market from 2018 to 2020 come due. With this, lenders are being more aggressive and having conversations with borrowers to determine the next steps: Do they want to pay off the loan or pull in different assets and refinance? With 5-year short-term loans coming due and movement in the market, we are seeing an increase in refinance requests from investors looking to refresh their portfolios. So, what is the right move? Investors are constantly thinking about the bottom line and there are certainly deals to be had as the market continues to change. Refinancing can help investors leverage a lower rate or tap into equity to make improvements or rehab a property. It is important to track the data and analysis to determine the next steps. Historically, refinancing could make sense for investors any time they are saving one or more percentage points. The terms of the loan should also be at the forefront of an investor’s mind when they are considering refinancing. Is there a pre-payment penalty? Carefully reviewing the terms of the original loan is vital. It is important to understand the rules and parameters of the loan before making a move. The Right Lender With every decision — from making changes to their portfolio to refinancing — investors must partner with the right lender who will help them make the best decision for their unique situation. The right lender will be proactive and communicate with investors frequently, keeping them aware of changes in the market and when it might be beneficial for them to refinance. Investors should seek out a lender that is not going to make them jump through hoops and someone who specifically understands the single-family rental space. Building an ongoing relationship with a lender can make a big difference. Investors should find a lender who understands the space, what they are trying to accomplish, and one who will help them get to their end game. Looking Ahead: What’s to Come It is tough for anyone to know what lies ahead but those of us who are in the space are always focused on margin and profitability. We are starting to see some areas where values are coming down and we have seen some rate improvement. If that continues into 2025, despite rental pricing coming down, investors could still find some good deals and make the margins they are looking for in their specific markets. And they should have a healthy swing on portfolio growth and allow for some continued pruning to happen in areas where investors want to sell. The lower rates will help the one-off purchase of these homes to homeowners. On top of everything else that is going on, we are also in an election year which could spark additional changes in the future for the real estate community.

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Understanding New Construction Investments

A Challenge Well Worth its Rewards by Andy Bates Navigating today’s market often requires a sense of dynamism. Working between flipping properties and rental holds has helped many investors maintain and grow their business, but these are not the only kinds of investments available to the savvy investor. New construction is another lucrative investment type but its distinction from an existing property comes with significant process changes for the investor. Understanding additional factors that play into a new construction investment and the best practices for them will illustrate a path to success for investors with this strategy. Building on Purpose As with any investment, before financial commitments are made, it is always advisable to thoroughly understand the undertaking at hand. Newly constructed properties serve a primary function of adding inventory to the markets in which they are built. When acquiring funding to construct new residences as investments, it’s important to consider the structure of those loans. While conventional lending can be used for the building of a new primary residence, investment financing is, by definition, commercial in its structure. The most important distinction here being that commercial loans cannot be used for primary residences. Such a use case would result in default on the loan. Instead, private funding focuses on investments, so any newly constructed residences would need to be sold or held for cashflow. Project Scope Beyond discerning their exit strategy, investors must also be aware of the scope of their upcoming project. It is one thing to build a new, one-unit or even four-unit property where a neighborhood already exists. It is quite another to consider the building of dozens or even hundreds of units. While different lenders will focus on, and provide for, projects of all scales that fit their buy-box, development, at any scale, requires an understanding of horizontals which may or may not already be in place. Horizontals are all installations which “attach” to a property or properties in an area, outside of the structures themselves. Roads, pavement, sidewalks, water and waste lines, gas and power are all examples of infrastructure that is imperative for a new build, even if they are not directly part of the cost and construction of an investment. Some lenders will only provide for new construction projects in which horizontals like these are already established. These can look like undeveloped lots in existing neighborhoods. In urban settings, “in-fill” projects are those that position new builds between existing structures in an established neighborhood. As the establishment of horizontals in areas without such infrastructure demand significantly more time, capital, planning and resources, opting instead to build on a parcel of land where horizontals are already in place can make it easier to acquire plans and permits for the build or even access financing. All in its Proper Place While the notions of obtaining approved plans and keeping up to code are not new to any experienced real estate investor, new construction comes with more groundwork in these areas. While an investor might be able to secure funding for light or even heavy rehab projects with as little as a scope of work or line-item rehab list, for new construction, plans and permits must be in place before funding can be secured and building can begin. Fortunately, even with an increase in paperwork comparative to other investment types, these documents tend to be fairly standardized across all US housing markets. Entitlement letters, zoning verification letters, and compliance reports are all examples of common documents investors can expect to work with on a new construction project. Many lenders servicing new construction investments will want to ensure they are executed by an experienced hand. In this way, it is important for the average investor to work with experienced builders and general contractors not only to secure necessary funding but also to ensure that the structure to be is sound. These professionals have verifiable credentials like references, project history and up-to-date licensing which can indicate to both lenders and municipalities that the project will be completed in accordance with code and compliance. If acquiring plans, permits, and approvals for a standard renovation takes time, then it stands to reason they might take much more time for a fresh build. Keeping on top of documentation is its own skillset and with more moving parts on a new construction comparative to other investments, it is imperative that investors keep on top of, and plan around timelines for approval. If an investor should find themselves without plans and permits in place prior to closing, all is not necessarily lost. Investors can leverage verifications on proposed plans with third party architects working within the local municipality. Additionally, investors may acquire formal confirmation of proposed plans from a state or local council where ordinances allow for these exceptions. Nothing Ventured, Nothing Gained With private lending, it’s common for construction and renovation projects to be funded under a reimbursement structure. This means that builds are planned in phases. Once a phase of work has been completed, it is reported to the lender who then sends out a third-party inspector to verify the work and materials used. With confirmation from the inspection, the lender releases funds to reimburse investors for each phase of work as it is completed. Reimbursements, alongside plans and permits, reinforce the need for investors to have a firm understanding of the scope of work for their construction investments. This includes what may impact timelines and how delays might impact the build overall, including the investors exit strategy. Opportunity for the Tactful In a housing market in need of inventory, a build-to-sell approach may seem like the obvious path for new construction investors. However, investors should be as thorough in their investigation of an exit strategy as they were when developing plans and acquiring permits. Market area indicators like housing starts, homes sales, and employment statistics are all useful metrics when considering the most favorable course of action in a given market.

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Maximizing Your Retirement Strategy

The Power of Self-Directed Accounts by John “Jack” Kiley, CPA, CISP I have been working with retirement accounts for a long time. As a young CPA, at the first CPA practice I worked for, I learned about self-directed retirement accounts. The firm’s basic recipe was to provide bookkeeping services for its clients’ business activities and then prepare the business and individual tax returns. As a client’s business became more profitable and cash flowed, we would layer a retirement plan into the mix, and the business would make tax deductible contributions to the plan. Effectively, the client was moving money from his ‘taxable pocket’ to his ‘tax deferred pocket.’ Many of these clients were involved in real estate in some fashion, either as developers, brokers, or investors. These clients were familiar with self-direction and were constantly asking how they could utilize these types of plans. Being the young (and stupid) guy at the firm, I was tasked with figuring out how to do this. It was at this time I became intimately familiar with self-direction. I learned very quickly that what self-direction really meant was the ability to invest in a vast array of asset classes beyond stocks and bonds. It was about this time when I also became familiar with investing in promissory notes. As an avid real estate investor myself, and being a numbers guy, I understood the financing of real estate and took an interest in it. Even back in those days, there was a dizzying array of financing products and lenders to choose from. I learned to marry promissory note investments and retirement plans. For me this was a perfect mix; and for you, it may be as well. Playing 3D Tax Chess First, the combination of your preferred investment, lending, along with self-directed retirement plans (SDIRAs) allows you to play three dimensional ‘tax’ chess. First, because SDIRAs allow for a wider spectrum of investment options, you can lend on your terms: tax deferred or tax free (Roth). Secondarily, you can also lend as you currently do in a taxable environment. This allows you to strategically lend. For instance, for opportunities that you feel have a high likelihood of success, you may choose to invest in the tax deferred or tax-free environment to maximize return. The opportunities that you might consider to be more risky or may need a little finesse, you might choose to do in a taxable environment. Careful planning is important because if you lose money in a retirement plan, you just lose. There is no tax deduction. Self-direction allows you to use your team to identify investments and perform due diligence. The custodian does not tell you to who you must use so long as they are not identified as ‘disqualified persons’ (A classification of people and entities the SDIRA cannot transact business with). This group is made up primarily of family members and you can contact your custodian for more information. This allows you to use vendors and professionals that you know and trust. Micro vs Macro Level Self-direction gives you the flexibility to invest in notes either on a micro or macro level. On a micro level, you are able to pick and choose debtors you wish to lend to and require whatever information you feel is relevant in making that decision. You control all the inputs including the amount, term, interest rate, and form of collateral. You are able to tailor these to give you the level of comfort you feel is necessary. This also gives you the ability to build your portfolio as you see fit. On a macro level, you are able to partner your capital alongside other capital to participate in larger loans or pools of loans. This allows you to tap into the expertise of others and gain access to transactions that you may not otherwise be able to reach. In fact, many of the large lenders in our field pool capital in this fashion and a significant percentage of that comes from retirement plans. Involvement in some of these investments may require you to certify that you have a certain level of assets to participate in the transaction (accredited investor status) so be prepared to provide this data. Lastly, there are a number of retirement plan options available to you. For individuals, there are Traditional and Roth IRAs. Most people are familiar with these. Traditional IRA earnings are tax deferred and Roth IRA earnings are tax free after a seasoning period. For business owners, there are a couple other plan options; SEPs, SIMPLE IRAs and 401k plans, among others. Many of these plans may have Roth components which gives you even greater flexibility. These plans also have higher contribution limits allowing for an accelerated ability to move capital from your taxable ‘bucket’ to your tax deferred or tax free ‘bucket.’ Self-directed retirement accounts give you the opportunity to use your expertise and knowledge to invest in assets that you may feel more comfortable with than marketable securities or at a minimum, not put all your eggs in one basket. Through careful thought and planning you are able to build the retirement nest egg you desire.

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Rising Trends and the Impact of Non-QM and DSCR Lending

Factors Influencing Alternative Lending Products By Amy Kame This article will delve into the rising trends and the impact of non-QM and DSCR lending on today’s housing market. The Evolution of Non-QM and DSCR Lending The aftermath of the Great Financial Crisis prompted a shift in the mortgage industry’s approach to underwriting. To mitigate risks, mortgage originations saw a tightening of standards, with increased documentation and verification requirements. In response, government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac introduced Qualified Mortgages (QMs) to establish safer and more sustainable options for consumers. QMs meet specific requirements set by the Consumer Financial Protection Bureau (CFPB) and are assumed to comply with the Ability-to-Repay (ATR) Rule. Non-QM loans, conversely, do not fulfill all QM requirements and are not required to meet the federal government and CFPB guidelines for qualified mortgages. Some characteristics that render loans as non-QM include limited documentation, debt-to-income (DTI) ratios greater than 43%, interest-only periods, terms exceeding 360 months, and lower FICO scores. In recent years, non-QM loans have gained traction in the real estate market. This growth is partly attributed to the introduction of debt service coverage ratio (DSCR) loans, where lending decisions are based on the cash flow generated by investment properties instead of the borrower’s personal income. Other non-QM products, such as bank statement loans and asset- based loans, offer unique solutions for borrowers with unconventional income sources or complex financial profiles. The non-QM market is poised for long-term, sustainable growth. The market faced liquidity limitations during the pandemic and reached its lowest level in 2020, at 2% of the market. Non-QM reclaimed its share in 2021 and almost doubled in 2022, representing about 4% of the first mortgage market (CoreLogic). Factors Influencing Alternative Lending Products Several pivotal factors currently influence the Non-QM and DSCR lending markets, such as rising interest rates, the evolving landscape of the securitization market, shifting demographics, and growing investor demand coupled with an aging housing stock. Together, these interconnected threads define the outlook of the non-QM and DSCR lending markets. The Impact of Rising Interest Rates and The Securitization Market The housing market faced challenges in Q1 2023 due to a surge in mortgage rates. Toward the end of 2022, rates reached over 6%, the highest level since 2008, up from just 3% at the start of the year. Unlike traditional agency loans, non-QM loans must be securitized and sold to secondary market investors, and dramatic pricing changes caused a liquidity squeeze. Lenders holding older loans with lower interest rates struggled to sell or exit them, resulting in pipeline freezes, which led to shutdowns, bankruptcies, and layoffs across the non-QM lending space. Although non-QM loans faced challenges in the secondary market at the end of 2022, there have been recent signs of recovery, as evidenced by securitizations from companies like Angel Oak Mortgage and A&D Mortgage. In June 2023, Angel Oak Mortgage REIT Inc. issued a nearly $285 million securitization primarily backed by non-QM loans, viewing it as an “inflection point” for the company. The securitization received a AAA  rating from Fitch Ratings, signaling investor confidence in the asset class. Similarly, in February, Fitch provided positive ratings to A&D Mortgage’s securitization, indicating that the securitization market for non-QM loans is gaining traction. As we continue through 2023, rates remain elevated, and originators have increased their non- QM product offerings, which provide borrowers with immediate relief through reduced monthly mortgage payments. The surge in interest rates has also prompted potential home buyers to opt for renting, resulting in a thriving rental market. Fitch reported a heightened focus from originators on attracting borrowers interested in DSCR products to drive production. These trends in the current lending landscape underscore the industry’s adaptability to changing market conditions. Demographics and The Self-Employment Trend Demographics play a pivotal role in shaping the housing market, and the rise of the millennial generation has significant implications. With over 72 million individuals, millennials constitute the largest population cohort in U.S. history. As millennials settle down, start families, and enter the housing market, their housing needs have significant repercussions for the market. Millennials also represent a considerable segment of the largest non-QM borrower cohort: the self-employed. The pandemic shifted traditional work culture, making remote work and self- employment more common. This newfound flexibility enables self-employed workers to move around the country and purchase homes in more affordable areas. One of the biggest misconceptions about non-QM loans is that they are exclusively for borrowers with poor credit. In reality, today’s non-QM loan pools often feature borrowers with FICO scores ranging between 730 and 740, DTIs that meet agency standards, and LTVs in the low 70s (CoreLogic). The growing trend of self-employed borrowers seeking non-QM products highlights the flexibility of this product to meet the needs of diverse borrowers. Investor Demand and America’s Aging Housing Stock The aging U.S. housing stock presents another key trend influencing the housing market. According to the National Association of Home Builders, the median age of owner-occupied homes is about 40 years. The residential construction industry has struggled to keep up with the demand for new homes, leading to insufficient supply. Moreover, investor demand for rental products has surged as property investors purchase single-family homes from downsizing baby boomers, refurbish them, and convert them into rental properties. This trend is another indication of the non-QM sector’s adaptability to serve the market’s evolving needs. The flexibility of non-QM lending allows lenders to quickly align products and services with shifting industry demands. The impact of rising interest rates, demographic shifts, and evolving investor preferences are driving change in the industry. The non-QM sector has shown resilience and adaptability as the industry navigates these trends. Non-QM and DSCR Lenders Embrace NPLA Conference The decision of NPLA and the National Private Lenders Conference to expand our offerings to Non-QM and DSCR lenders shows our commitment to the evolving real estate market. The conference empowers industry professionals to stay informed about the latest trends and developments by providing education and opportunities within

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Private Real Estate Credit

Investors Are Taking Notice By Brian Walter and John Lettera Commercial real estate focused on one to four and multi-family is in the initial stages of a seismic shift in its financing. The recent ills of regional banks, along with the threat of impending legislation and the need for greater balance sheet liquidity, means that capital that used to flow freely is drying up—with no sign of easing. The financing path to creating a stabilized asset is changing rapidly, and private real estate credit will play a crucial role in providing capital for commercial residential acquisition and development, as well as for other real estate sectors. Regional banks are paused on lending Regional banks make up over 50% of real estate lending in the U.S. As seen with large regional players like Silicon Valley Bank and First Republic Bank, regional banks are now squeezed on liquidity, fear a run on their deposit base, and are overweight in real estate loans. To create a more liquid balance sheet, they could sell assets which could produce realized losses, which is not an ideal choice. Their next best option is to pause or slow lending. Banks are even declining real estate loans for those with whom they have long-term relationships. Private real estate credit is actively lending, and new borrowers are noticing A new wave of borrowers sees what many builders were already attuned to: that private real estate credit comes with higher rates. But there are significant offsetting advantages that make it a highly attractive source of funding—and private credit has funds to lend. Just as corporations once balked at private alternatives to JP Morgan, Citigroup, and other institutional lenders circa 2010, those corporate borrowers found that the delta between bank rates and private rates was not that material once you factored in private lending’s faster execution and ease. And private corporate lenders found that their new borrowers were also better quality, having been pre-vetted by the institutional banks. Parallels between the rise of private corporate credit and private real estate credit The exodus from corporate to private credit post Dodd-Frank changed the corporate financing landscape. As demand for private credit grew, and investors saw the burgeoning opportunity for returns, loan sizes were able to increase. Today, there are private corporate lenders who, on their own, can issue a $1+Billion loan, placing them in the same rarified league as institutional banks. Corporate borrowers gained appreciation for the fact that private corporate credit is not hamstrung by bureaucratic red tape. With flatter organizations and less regulation, private lenders can be more creative in their loans. Furthermore, whereas institutional banks would syndicate their loans causing borrowers to work with hundreds of smaller holders when they wanted to make loan changes or amendments, corporate borrowers now basked in the relief of working with just one or a few private lenders. Private real estate credit offers the advantages of private corporate credit: speed of execution, creative financing solutions, and a lender who will work with borrowers when challenges arise. The seeds are planted for this market to experience the same growth as private corporate credit. Real Estate Bridge Lending Bridge lending serves a valuable role in providing private short-term capital to real estate developers. Bridge loans can be anywhere from 3-24 months and fill the financial gap between property construction or rehab and when a property can start generating income. Once a property starts to generate cash flow, the developer can switch to a bank or agency loan, or exit. Bridge loans have not received as much attention as bank loans, but that is changing. For many builders, bridge loans have become a staple of financing development for three very compelling reasons: less paperwork, faster execution, and greater flexibility. Developers who never explored private credit are taking a closer look. A private market bridge loan can close in less than a month compared to the three or four months to close on a bank loan. With a private market construction draw, a developer can gain access to money in as little as five days versus three or four weeks through a bank. Speed is important to securing opportunities. Developers counter the private market’s higher rates with the costs that can be incurred by not moving quickly. With construction draws occurring faster with a private loan, a developer can build quickly and keep subcontractors happy. Waiting for bank construction draws can make a project take 1-2 months longer to finish and create tension with subcontractors. While bank financing is cheaper, the developer may have the loan outstanding for more months because of slow bank draws. Plumbers, electricians, and other skilled subcontractors are in high demand and short supply, so paying subs promptly is essential to keeping them on the job. If a builder waits for a loan draw or even for a loan to close, the money to pay subcontractors must come from the builder’s own pocket. The construction draw process from a private bridge lender can ease the pressure on a developer’s working capital. Investors are taking notice This seismic shift is also gathering attention from investors. The potential for non-correlated higher returns (through higher loan rates) is complemented by a hard asset as collateral to protect principal. Depending on a bridge lender’s approach for repeat borrowers, leverage, geographic diversification, and due diligence, risk can be mitigated even further. In the case of non-performance, private lenders stand before all others in getting recompense. Investors who participated in corporate credit now pat themselves on the back for consistent returns. With quality builders looking for funding, investors interested in private real estate credit are at the same watershed moment that corporate credit was 13 years ago. With demand for loans far outpacing available capital, managers can be more discerning and structure better loans. Shifts in financing create opportunities Change causes us to look at the world with fresh eyes. Where large corporate banks once controlled corporate credit, private corporate credit has become a force. Where regional banks

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