Los Angeles has become a hub in recent years for unregulated, privately funded real estate financiers that offer short-term, multimillion-dollar loans with steeper interest rates than banks.
So-called bridge loans help underwrite the kinds of construction developments and other major projects that can’t get financing from a traditional lender — often because the price tag is too high or the timeframe is too short for banks to make a loan while also passing regulatory muster.
Behind New York, L.A. is the top U.S. market for bridge lenders, analysts said. The volume of unregulated loans has raised some concerns as competition has driven lenders to make riskier bets on borrowers.
“There are lots of concerns that credit standards have declined, and a lot of businesses have become overleveraged,” said Bert Ely, an Alexandria, Va.-based banking consultant.
But for bridge lenders, who charge more in interest, the payback is often worth the risk. That has led to a boom market in Los Angeles.
“There’s been an incredible amount of activity here,” said Jeff Friedman, co-founder of Brentwood-based lender Mesa West Capital.
Friedman and other L.A.-based bridge lenders aren’t only making loans locally. According to several executives, the L.A. industry holds a healthy pipeline of loan originations that have helped fuel double-digit growth for many firms.
That kind of growth has attracted the attention of traditional financial institutions, both inside and outside L.A., who are increasingly expressing interest in acquiring the bridge-lending businesses.
Investment backing giant Morgan Stanley acquired Mesa West in September 2017.
Friedman said Mesa West operates separately from Morgan Stanley’s bank, originating bridge loans often worth tens of millions or hundreds of millions of dollars to developers of office buildings, apartment complexes, warehouses, retail centers and hotels.
Mesa West isn’t the only game in town that has caught the acquisitive eye of big banking behemoths from New York.
“We get calls every week to buy into our firm,” said Brendan Miller, chief investment officer of downtown-based Thorofare Capital Inc., which has originated roughly $2 billion in loans since its founding in 2010.
Thorofare hasn’t accepted any of those acquisition offers, but the firm teamed up with downtown’s DoubleLine Capital, a more traditional investment management outfit, to give DoubleLine’s investors access to a new pool of short-term real estate loans.
Goldman Sachs Group Inc. bought private mortgage lender Genesis Capital of Woodland Hills in late 2017 as a new business line.
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