Why short-term loans work in times of crisis: questions and answers
Focusing on short-term financing solutions is how many lenders have chosen to stay active amid the uncertainty caused by COVID-19. According to Electra Capital President and CEO Sam Greenblatt, while certain asset classes have been heavily impacted by the pandemic, multi-family is one of the sectors that continues to perform relatively well. In the interview below, Greenblatt explains how the pandemic is shaping the alternative lending space.
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How have underwriting standards changed in terms of short-term lending since the start of the pandemic?
Greenblatt: Our underwriting standards have changed a bit. We have reduced the leverage that we are prepared to exert on our products. Before the COVID-19 pandemic, we were able to go up to 93% of the capital stack on our participating preferred stock product and 90% of our standard preferred stock and mezzanine loan product. Today, the maximum leverage would be 90% on the participating Preferred Product and 87% on the Non-Participating Product.
Are there more risk sensitive loan products in the coronavirus era?
Greenblatt: Obviously, we’re very lucky to only do multi-family properties, which have done pretty well in this environment. We focus on transactions where the leverage is not as high, in addition to very high quality assets and sponsorship. The most problematic asset classes are retail and hospitality.
Agency loans and bridging loans are among the few financing alternatives currently available. What can you tell us about the terms offered by these options and what can borrowers do to better qualify?
Greenblatt: The agencies tightened their underwriting and included reserves financed for the service of their debt which would be between six and 18 months. Therefore, the net proceeds of this type of financing would require more equity from the promoter. Bridge lenders reduce the leverage on their products, thus requiring more equity for each transaction or the need for the sponsor to obtain preferred equity or mezzanine loans.
Electra Capital mainly focuses on transactions in the Sun Belt. Can you tell us why you chose this region and if you have any expansion plans in mind?
Greenblatt: We love the Sun Belt primarily because that’s where most of the growth in this country is. Most of these states also have very business friendly governments. In addition, this is where our affiliate, American Landmark Apartments, operates, which gives us additional support in these areas. We think we’ll eventually expand to the east coast, from South Virginia to northern New Jersey.
What does your business look for in a transaction when it invests in preferred shares?
Greenblatt: We look asset quality, as well as the submarket where the property is located. We also look at the sponsorship and decide if it is someone we would like to do business with, not only for the current transaction but also for future deals. Relationships are very important to us.
What can multi-family lenders like Electra Capital do to better adapt to economic uncertainty?
Greenblatt: It is important that lenders are very clear and honest in their ability to provide capital and execute, so that sponsors can count on them so that they do not risk losing deposits and money on transactions they buy.