Magellan Group Inc. knows firsthand just how crazy commercial real estate finance is these days.
The Century City industrial developer recently completed a deal that saved it millions, and, ironically, never would have even warranted a term sheet during the boom years.
Magellan was able to repay a $45 million loan on a fully leased City of Commerce business park at a 29 percent discount simply because the lender wanted the debt off its books and couldn't sell the full loan in the secondary market.
There was a catch, though. Magellan had just 30 days to complete the deal before the discounted note was offered up to some other entity.
"It was a complete surprise to us. It was both a threat and an opportunity," said Magellan co-founder Kevin Staley. "It was something we felt we really needed to try to make happen."
What ensued was a mad scramble to find financing that only ended when a new player in L.A. real estate Mesa West Capital LLC ponied up $26.5 million to complete the $32 million note retirement.
"We explored the entire market that was available. We probably talked to at least 50 groups," said Brian Halpern of CB Richard Ellis Group Inc.'s capital markets division, who arranged the financing with Mesa West and a second lender.
The topsy-turvy loan market created the deal of a lifetime for Magellan, but others haven't been so lucky. The credit crunch and recession have crippled real estate finance, especially the secondary market in which loans are either resold whole or sliced up for mortgage-backed securities.
These days, if you need a commercial real estate loan whether financing an acquisition or buying back a note you'll have to have a thick skin, a thick wallet and an even thicker Rolodex.
But in this environment, a new set of lenders has stepped in to try to fill the void.
Local companies such as Mesa West, Buchanan Street Partners Inc. and Karlin Real Estate are either already making loans or are ramping up to do so. And local hard-money lenders such as Peak Financial Partners Inc. and Fidelity Mortgage Lenders Inc. are expanding their reach in the lower end, or riskier side, of the market.
"Our lending will help fill the void, but the void is massive given the impairment of the major financial institutions," said Jeff Friedman, Mesa West co-founder and co-chief executive.
Indeed, Mesa West, backed by investments from public pension funds, is one of the few new private lenders doing deals.
The West L.A. company's first $207 million fund, which it leveraged up to $1 billion using credit lines with commercial and investment banks, was invested from 2005 to 2007. The company has begun lending from a second fund that has not yet closed. The first fund focused on short-term first mortgage bridge loans on performing office, multifamily, retail, industrial and hospitality projects. The second fund has a similar focus.
The company generally makes loans of $10 million to $50 million with interest rates of 8 percent to 10 percent on only about 70 percent of a property's underlying value. By playing it safe, the company claims to be well positioned with about half of the first fund already repaid and only 45 of 83 loans still on Mesa West's books.
"A lot of our competitors were making loans on condos and land with 90 percent (loan-to-value) lending and we didn't do any condos or land," Friedman said. "With (70 percent) there's stress, but it is manageable stress."
Mesa West is looking to lend about $300 million this year, though Friedman declined to discuss how much has been raised for the second fund, which could be closed by the end of summer. Industry sources said that Mesa West has raised about $425 million for the second fund, creating $1.5 billion in lending capacity.
Friedman said he expects that the fund largely will focus on recapitalizations and refinancing because investment sales are down by 85 percent to 90 percent as buyers and sellers wait to see how far the market will drop.
One effect of the downturn is the sidelining of some of Mesa West's direct competition. GE Capital, the finance arm of General Electric Co., was a traditional rival but several sources said GE Capital is not currently making loans. The company did not return calls seeking comment.
With so many traditional players out of the picture, Mesa West is now competing with life insurance companies and, on a limited basis, some commercial banks.
Other companies that are said to still be lending money including Wells Fargo & Co., John Hancock Financial Services Inc. and City National Bank, among others also declined comment or did not respond to requests for interviews. Experts said established lenders are loath to reveal their strategies or exposure in the current market.
Two private lenders looking to enter the market are Buchanan Street Partners and Karlin Real Estate, companies that only launched lending practices in the last six months.
Newport Beach fund manager Buchanan Street Partners, a unit of downtown L.A. money manager TCW Group Inc., debuted a first mortgage lending business in mid-January, with offices in downtown Los Angeles, Chicago and Atlanta. Buchanan has raised money from pension funds and insurance companies.
While the company has yet to make a loan, Buchanan Managing Director Wayne Brandt said that the company has given several term sheets to prospective clients and has the capacity to lend several hundred million dollars. Loans are expected to be in the $15 million-$50 million range.
"We don't have any set volume target we have to hit," Brandt said.
The company plans to make loans with loan-to-value ratios in the 50 percent to 75 percent range. Interest rates would be about 8 percent to 9 percent for lower leverage loans and higher leverage loans could have interest rates in the midteens.
"We are comfortable betting that the credit markets will heal probably before the commercial real estate markets," Brandt said. "It will still take several years for the recession to work its way through commercial (real estate)."
The company is taking a conservative approach to lending Brandt said he still gets many loan requests he immediately rejects.
"They are deals no lenders are going to lend on. They have fundamental flaws in them sponsorship questions, vacancies or tenants leaving properties," he said.
Karlin Real Estate is a unit of Karlin Asset Management, a West L.A. company that invests on behalf of billionaire spinal surgeon Gary Michelson. It established a lending practice last fall and has yet to make a loan, but Managing Director Matthew Schwab said "a couple are very close to closing."
Schwab described Karlin as a "special situation lender" for acquisition, refinance or debtor-in-possession deals. He said the company would likely make mostly multifamily, office and industrial short-term loans in the $5 million-$50 million range.
Schwab declined to say what the company's interest rates would be because they will be wide-ranging, but he expects the company to be successful because of an expertise in properly valuing properties.
"Everybody got caught up with the loan-to-values. Are you at 80 percent? 70 percent? What most lenders forgot about is, what is the value? We are very good at assigning value," he said. "If we can do that, we can be good lenders."
A lack of lending by the traditional players has opened the door for another segment of the market: hard-money lenders, who typically charge interest rates in the teens or higher and work with borrowers who can't get loans elsewhere.
Eli Tene, co-founding partner of one of the larger local hard-money lenders, Peak Financial of Woodland Hills, said that his company has done about 10 deals this year, but they are different from loans funded in the past.
A year ago, the company "did almost every kind of product land, industrial and commercial," Tene said, but it is now focused on making loans that are used to purchase properties held by mortgage companies after unsuccessful foreclosure auctions.
Peak typically loans $2 million to $7 million with interest rates between 12 percent and 13 percent. Tene said the company, which has an unnamed institutional partner, is looking to lend about $300 million this year.
Borrowers typically turn to hard-money lenders as a last resort. But Charles Hershson, president of Fidelity Mortgage, another hard-money lender, has watched business pick up this year and it hasn't come from the usual applicants.
Fidelity has made about 60 commercial loans in the first quarter, with the majority of deals being refinances. He's also made a number of loans to finance his clients' purchases of distressed real estate notes. Loans typically range from $350,000 to $500,000.
"If the borrowers from before were getting turned down from banks, they would come to me, and they were not-too-goodniks," said Hershson. "Now we are getting borrowers with far more credibility than before."
Joe Delgatto, owner of Pantorium Cleaners Inc., mortgaged his Sierra Madre dry cleaner in February in return for a $260,000 loan from Fidelity. He went with the company after a national bank he patronizes turned him down for a loan in November.
"They sent me a letter saying they are not lending. They wouldn't even give me the time of day. I was very upset with them," said Delgatto, who declined to name the bank. "I had done business with Charles before. By the middle of February I had the money in the bank."
Of course, for all the new players in the market, there are still thousands of traditional lenders making deals. It's just that they are harder to come by and sometimes it's also relationships that can make all the difference.
Santa Monica retail developer JS Rosenfield & Co., owner of the Brentwood Country Mart, bought a Marin County shopping center in January for $65 million. The deal was financed with a $37.5 million loan from City National Bank, with a loan-to-value ratio between 50 percent and 60 percent.
Steven Lurie, a Greenberg Glusker Fields Claman & Machtinger LLP real estate attorney, helped arrange the loan. He said that in years past, the deal would have been financed with a conduit loan, but now there are far fewer options.
However, JS Rosenfield principal James Rosenfield had a long history of business dealings with City National that "had a lot to do with my ability to acquire the property."
"It's a relationship bank," said Rosenfield, who years ago got his first commercial real estate loan from Bram Goldsmith, the former chairman of the bank.
Bram Goldsmith's son, City National Chairman and Chief Executive Russell Goldsmith, got Rosenfield the shopping center loan.
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