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Acra Lending

Coming Out of Volatility Stronger Than Ever By Carole VanSickle Ellis In February 2022, Acra Lending CEO Keith Lind observed with confidence in an interview for an industry magazine that the previous 18 months had been “lucrative for non-QM lenders” and noted proudly that “a high percentage of the time Acra can find a solution for our borrowers [because] we have the ability to look outside our guidelines and find solutions for very difficult situations.” Lind went on to predict that opportunities in his company’s lending space would expand over the course of the coming year and that the burden of the “bad credit” image non-QM loans used to bear would continue to fade. “In most cases, investors and borrowers have very good FICO scores and plenty of equity to put down to secure private financing,” Lind said. “These loans are not subprime loans. Our borrowers are putting down real equity; the weighted LTV of our loans is around 66%…. Self-employed borrowers have really become the backbone of the industry,” he concluded. The Acra CEO had a solid basis for his predictions. Acra Lending has been in business since 2003 and weathered multiple financial and economic cycles including the 2020 COVID-19 pandemic. “Acra has only grown stronger over the last several tumultuous years,” chimed in Kyle Gunderlock, president and chief risk officer for Acra Lending. He added, “Our competition has struggled, failing, going out of business, and, in some cases, even dishonoring [interest] locks and loan terms, but Acra has managed risk carefully and managed to come out of the last few years even stronger.” Acra is a non-qualified mortgage lender, which means the company originates mortgage loans based on alternative methods of borrower qualification, such as bank statements or assets. Real estate investors have long made use of this type of loan to avoid “traditional” mortgage loan requirements that limit the number of non-owner-occupied (NOO) properties a borrower can own and prohibit the use of popular business entities like limited liability corporations (LLCs) to close on a property. Acra prioritizes these investor-borrowers, believing that supporting this population is not only good business, but also good policy. “Most non-QM loans are centered around providing investors with loans to buy investment properties, and that important market just continues to grow,” said Jeffrey Lemieux, managing director of correspondent lending for Acra. Lemieux described the need for a “housing supply surrogate” for the large volume of the U.S. population that has been priced out of purchasing a home but find the opportunity to rent renovated or rehabbed properties a viable solution. “That market will continue to grow as long as interest rates either continue to rise dramatically or remain high,” he explained. “Those folks may have been priced out of being able to afford a home with a mortgage, but they still need a home. The investment community is filling a void in the market where public homebuilders alone cannot keep up alone.” Providing Accessible Quality in a Tough Industry When many people hear the term, “non-QM loans,” they automatically assume the note in question is unlikely to be of particularly good quality. Historically, non-QM loans were often relegated to the same category as sub-prime loans, from which they are very different and entirely distinct. Since its founding, Acra Lending has prioritized the creation and cultivation of an investment loan program that, as Lemieux describes it, “offers loans that perform well and, from where we sit, fit from a credit-quality perspective as well as a demand and opportunity perspective.” Lind recalled launching the fix-and-flip lending channel at Acra back in 2022, observing that there had been an ongoing, significant need for the product that has only grown since that time. “The average house in America is 40 years old, and a lot of them need a facelift,” he said. “This lending space is going to be around for a very long time.” To accommodate the expected growth, the Lind spearheaded a massive hiring initiative, doubling his workforce between 2020 and 2022. He credited Acra’s company culture for its streamlined, high-speed growth. “I’m a big company-culture person,” he said. Gregory Meola, head of business development and strategy at Acra, described its growth strategy as a “walk-before-we-run” approach. He explained, “Our guidelines, our lending policies, the amount of due diligence we put into every single property before making the funding commitment, is probably more thorough than others’. We are not dependent on growing [a given] division out of need to produce high volume or high profits because these are not the only things that fuel our earnings statements. We can increase our volume comfortably because we have the experience and the performance under our belt to do so, but we are not ever forced into growing faster than would otherwise be prudent.” As market demand evolves and changes, Gunderlock said he expects the demand for Acra Lending products to continue to increase because residents want modern benefits like a third bedroom, which most older apartment buildings lack. Many newer developments cannot offer this extremely attractive layout either because U.S. building codes create a demanding series of architectural maneuvers not necessarily required in other countries. For example, according to construction policy journal The Center for Building in North America, a multitude of requirements governing hall width, staircase enclosures, bedroom-window requirements, and wheelchair turning radii in elevators, among many others, create a building environment in which it becomes prohibitively costly to build high volumes of three- or even four-bedroom apartments. In response, residents begin actively seeking out single-family rental (SFR) properties and the investors acquiring, rehabbing, and managing those properties need increasingly large amounts of loan capital to fund these projects. “We view this lending as a very important part of what our industry does to help our investor customers turn over older, sometimes dilapidated homes into new housing stock so more families can get into a home,” Lemieux said. “People need that third bedroom to support their growing families.” A Culture of Constant Learning, Grit

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Hot Springs, Arkansas

Hot Waters & a Hot Market for “America’s First Resort” By Carole VanSickle Ellis In Hot Springs, Arkansas, 47 natural thermal springs send about 1 million gallons of water measuring 143°F flowing through the area before emptying into Lake Hamilton. The city, which is sometimes referred to as “The Valley of the Vapors” and has dubbed itself “America’s First Resort,” has been primarily supported by the hospitality industry since long before that term existed. Hot Springs is also considered to be the “birthplace” of Spring-training baseball thanks to hosting the Chicago White Stockings (now the Chicago Cubs) in 1886. In subsequent years, many other teams followed suit. The area boasted casinos and other gambling venues until the late 1960s (today, they are once again in operation) and has long been home to spa and bath houses, health centers, and medical facilities. In keeping with its unusual and diverse attractions, the Hot Springs housing market tends to go against the grain and stand apart from state and national trends both in terms of avoiding extreme or protracted lows and in terms of remaining relatively calm even in the face of national volatility. Of course, that relative lack of volatility does not mean that the market has not seen growth over the past few years. In fact, Hot Springs is currently on a bit of a “hot streak” that is probably not over yet, experts say. “The Hot Springs housing market has seen a 6.2% appreciation rate over the last five years, [and] over the past 10 years, the city experienced a cumulative 29.99% appreciation rate,” observed Movoto analyst Alan Woods. He also noted the Hot Springs appreciation rate is “about 50% higher than other Arkansas cities,” possibly in part because the city boasts “the only legal casino for hundreds of miles.” Hot Springs real estate benefits from the unusual nature of the local hospitality industry, which is more focused on health and wellness than many such markets. As a result, the area does not always experience the sharp economic swings to which similar markets are subject. Even during the Great Recession, when national home prices plummeted, Hot Springs median home values fell relatively small amounts and recovered quickly, falling briefly between 2013 and 2016 only by about $6,000 at the nadir and exceeding 2013 prices by the start of 2017. The trend of gentle price acceleration continued until 2020, which posted a minor dip of just about $3,000. By 2021, home values were climbing once more. Woods credited the city’s focus on historic preservation and renovation as a significant contributor to local housing market health. According to a 2020 study published by PlaceEconomics, “Hot Springs is the star” when it comes to preserving historic buildings and landmarks in ways that benefit the local economy. The group also called the city “a national success story” for its leverage of tax-credit programs encouraging historic preservation toward creating new jobs and businesses in the area. Between 2009 and 2020, 16 major initiatives led to nearly half a million dollars in annual earnings, jobs, and local tax revenue, creating momentum that shored up downtown Hot Springs during the COVID pandemic and associated lockdowns. However, Hot Springs did not emerge during the pandemic as a “zoom town,” a location to which people moved in order to avoid more urban areas, but rather simply posted steadily rising real estate values that have not yet ebbed or leveled off. This is a positive sign for the market because many zoom towns are expected to soften as more companies backpedal on their “permanent-remote-work plans” and require employees to return to the office. A Healthy Market for the Buyers Seeking Affordability Despite its unique natural attractions and recession-resistant housing market, Hot Springs real estate has remained consistently affordable relative to the rest of the country. In fact, it is consistently listed as one of the most affordable areas in the country in which to own real estate. According to Payscale.com, area housing expenses are 17% lower than the national average and transportation expenses (bus fare, gas prices, etc.) are about 11% lower than the national average. Food and grocery costs tend to hover around 3% below the national average, while healthcare is a full 20% lower. Interestingly, the relatively low cost of living in the area (Hot Springs median home prices were about $150,000 lower than the national median home price in July of this year) could be having some unexpected fallout for housing-choice voucher programs in the area. According to reporting by the Arkansas Democrat Gazette in August 2023, the number of Hot Springs landlords willing to accept housing choice vouchers is on the decline. In fact, 13% of the vouchers assigned by HUD this year were not in use at the end of May. “There has been a shift in the market primarily due to economic conditions but also short-term rentals,” said economic planning consultancy RKG president Russell Archambault during a July Board of Directors work session in Hot Springs. He said short-term rentals have created “a different economic incentive for moving away from those subsidies: less management, higher profits.” Archambault warned the city could lose its rental vouchers if the issue is not “cured.” Hot Springs recently increased vouchers to 120% of fair market rent in hopes of making them more attractive to property owners and real estate investors. Short-term rental owners may soon encounter another incentive to look closer at housing vouchers; the Hot Springs area has begun targeting vacation rentals in an attempt to rein in what locals describe as “unneighborly behavior” in the properties. One lakefront neighborhood recently forced a local vacation-rental owner to apply for a special-use permit for their investment property and, subsequently, the Hot Springs Board of Directors denied the owner that permit. The board cited high densities of short-term rentals in the area as the reason for the denial.One director asked, “At what point do you have the density of short-term rentals before you say this is really becoming

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The State of the Market

Funding and Alternative Lending Strategies By Jennifer McGuinness-Lubbert To say that the last 18 months have been “quite a ride”, would be an understatement. The Fed raised the Fed Funds rate target at its fastest pace in history. During the first half of 2022, the central bank raised rates three times, ramping up the size of the increase each time, culminating in June’s aggressive 75 basis point hike. Before June, the Fed hadn’t raised its flagship policy rate by 75 basis points in any single meeting since 1994. The Fed continued its aggressive battle against inflation over the course of the year, with three additional 75 basis point increases during the second half of 2022. Then in December, the Fed tacked on one more but this time, slightly less aggressive, with a rate hike of 50 basis points. Were we seeing light at the end of the tunnel? The federal funds rate ended 2022, 425-450 basis points up from ZERO at the start of the calendar year. With most of the financial and economic research world believing that the central bank will leave short-term interest rates in the current 5.25%-5.50% range at the close of its Sept. 19-20, 2023, meeting, the main unknown is how policymakers will reshape their “stale” forecasts from three months ago, as they were shown to be, at times, materially incorrect. Economic data since the Fed’s mid-June meeting, has persistently surprised to the upside, hence, the Fed will need to go “back to the drawing board,” as their outlooks saw declines, rising unemployment and only modest improvements in inflation. Many are predicting that given the (at times) “prettier” picture, that the Fed will not raise the rates further — but speculate that they are not yet ready to indicate that they are “done” from a tightening perspective. Declaring that they have completed their cycle would likely lead to a significant easing of financial conditions. Personally, I predict that we will see one additional 25 basis point increase. By the time you are reading this article, we will know the answer. Easing financial conditions could mean higher stock prices or lower bond yields, which could stimulate spending and borrowing and trigger an increase in inflation, which is what the Fed is trying to avoid. In my humble opinion, this means the majority of Fed policymakers will probably still consider a year-end policy rate of 5.6% to be where we should be, which is one quarter point above where it is now. Although there are still some economists that believe that the Fed will raise rates again toward the end of the year, many other economists also expect Fed policymakers to pass fewer rate cuts next year. Financial markets are currently pricing for rates to fall to 4.4% by the end of 2024 and 3.8% by the end of 2025. The September meeting will be very telling on this front. Generally, all of the economists and researchers expect to see substantial “upgrades” to the initial forecasts they presented, as despite the 525 basis points of interest-rate hikes over the last 18 months, the U.S. economy expanded at about a 2% pace in the first half of this year, and may be growing even faster in the current quarter. There may even be a glimpse from the Fed that they are more optimistic regarding the labor market, for example, as the unemployment rate leapt to 3.8% in August, its highest since before the Fed began raising rates. But people losing jobs was not the driver of this increase — it was the number of people looking for work, which is a symbol of strength more than weakness. Last summer, inflation at its peak was 7% and has been falling rapidly this year to 3.3% in July, only slightly higher than the 3.2% rate the Fed predicted it would see at the end of this year. Where are mortgage rates today? The national average 30-year fixed mortgage rocketed past 7% in mid-August, reaching a 2023 high of 7.23%. As of September 14, the average 30-year fixed mortgage rate stood at 7.18%, according to Freddie Mac. Despite these high mortgage rates and home prices, the market remains as competitive as ever, thanks to the fact that demand levels are still currently surpassing the lack of inventory available and because homeowners who locked in low interest rates are not selling their homes. Many point to these features as evidence of an affordability crisis and blame it for why certain people are not so quick to go out a buy a home. Today’s mortgage spread, which is the difference between the 10-year Treasury bond yield and the 30-year fixed rate mortgage—is approximately 300 basis points. Historically, the spread should be between 150 and 200 basis points. Lawrence Yun, the chief economist of the National Association of Realtors, predicts that spreads will begin to normalize and that mortgage rates will fall to around 6% by the end of 2023. I’m not sure that I agree that we will get to 6% by the end of 2023, but I do believe we will see rates begin to come down next year and begin to stabilize this year. According to recent data, the median new home sales price in the United States that dipped to a 2023 low of $417,200 in April, increased to $436,700 by July. Year-over-year new home sales have also increased, surging by 31.5%, even as existing home sales continue to sag or increase. Finally, single-family construction starts increased 6.7% following a decline in June and applications for building permits rose 0.6% from the previous month. Let’s now assess the opportunity While housing is regional and trends differ by location, the East Coast and Midwest (for example, 4%+ in Chicago and Clevland) are seeing strength in their home prices, while on the West Coast, places like Nevada (-8% in Vegas) are seeing a decline. Right now, overall home prices in 2023 appear to be more than just a seasonal increase. Also, we

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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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Six Keys to Finding the Best Funding for Your Investments

The Effort to Study These Factors Will Be Worthwhile By Rob Parsley What is the best source of funding for your real estate investments? Investors answer this question in different ways. Some prefer the security of working with banks. Some prefer the fast-and-loose style of local hard money lenders. Others prefer the proven processes and asset-based underwriting of private lenders. But many investors have had to set aside their preferences and find alternative funding sources for their investments because of macroeconomic changes, notably interest rates that have increased nearly 400 basis points in the last 24 months. The current economic environment has caused some funding sources to dry up and down the market, from large regional banks that made national news to national private lenders that were acquired by competitors to local hard money lenders. No single category of lending completely vanished, but no category was immune either. That makes the search for funding more important than ever. Here are six primary factors that investors and brokers need to vet when considering a lender: Rates and Fees Of course, investors look for the best deal they can find in terms of raw numbers. This is essential in a higher interest rate environment because deals need to pencil out, whether the investor is selling a flipped property or acquiring a cash-flowing rental home. In today’s market, rates can vary significantly because different lenders have different risk tolerances. And it is important for investors to also check fees—both at closing and throughout the life of the loan—to make sure that the total costs of financing work. Leverage In 2022, many lenders pulled back on loan-to-cost and loan-to-value percentages to protect themselves against potential declines in home prices that could turn deals upside down. But in the past 12 months, home prices have proven to be durable in most markets. This has allowed many lenders to stabilize the leverages they offer. Still, investors need to make their own risk tolerance judgment on how leveraged they want to be, just as lenders have done. An uncertain economic environment may not be the best time for an investor to maximize leverage and take on additional risk. Deal Structure Some lenders lead with rate and leverage, while including onerous terms in a deal that limit flexibility. Deal structure is especially important now because higher interest rates and record home prices have increased mortgage payments on investment properties, which challenges cash flow even with rents at all-time highs. So, investors need to find deal structures that will allow for refinances when the price of owning an investment property decreases. They can find this flexibility by asking questions:  »         What is the prepayment penalty structure?  »         What are the yield spread maintenance terms?  »         Is minimum interest included in the deal?  »         What are the adjustable-rate terms? Investors need to be able to refinance a deal if rates decrease and do so without paying significant penalty fees. Loans that preserve future flexibility—such as interest-only bridge loans or no prepayment penalty loans—are especially valuable now. Servicing and Draw Process The closing table is just the beginning of a project, so investors need to know how a lender will service their loans. Are the servicing rights sold, or will the lender service their loans in-house? If there is a rehab or construction budget attached to the loan, the draw process is even more pertinent. Does the lender process draws in-house, or will a third party handle them? How quickly will draws be released? The flow of these funds is vital to a project’s success. Capital Backing A lender’s source of funding, and the reliability of that source, are factors that investors did not need to worry about when money was cheap, and lenders could easily find funds to disperse. But as interest rates rose, and as some banks and lenders found themselves overleveraged, it was not as easy for lenders to find capital to continue originating. As a result, lenders of various sizes ceased lending. Investors need to do the research so they know their lender will be ready to offer funds whenever they find their next deal. Secondary Market Strategy Where will your loan go after it is closed? This is another factor that many investors did not worry about in the past, because the secondary market set up favorably for loans to be resold. But today’s environment where money supply is tighter has forced investors to know more about the secondary market. Secondary market requirements around credit quality, leverage, rate, and more impact how lenders structure their deals. Lenders who know which secondary market source will acquire their loans after closing will not change rates or leverages on a whim, because they can operate on the same page as their loan buyers and maintain a consistent loan offering. For example, at Lima One Capital all our loans go to our parent company, NYSE-listed REIT MFA Financial. We work closely with them to develop loan guidelines that help investors succeed while serving as sound investments, and we can stick to those guidelines to give our borrowers confidence. On the other hand, lenders who must find sellers for most or even all their loans are at the mercy of the secondary market and may be compelled to change loan guidelines on short notice so that they are not stuck holding loans, which would drastically limit their funds for future lending. Conclusion The search for the right lender can lead to multiple answers. Investors may find a small hard money lender with plenty of money on hand to finance multiple projects. Builders may find a well-capitalized local bank that is willing to offer highly competitive ground-up construction financing. And investors still have access to strong national private lenders like Lima One with dependable sources of capital that are willing to finance fix and flip, new construction, single-family rental, and multifamily investments. The hard truth is that it will take more work for investors to find the right lender in this

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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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