Private Credit Intro and the Market for CRE Bridge Loans
Baseline Partners is an alternative private credit investor that aggregates commercial real estate bridge whole loans. Let us dig a bit deeper into what the above means.
A private credit investor is one that operates in private markets, as opposed to public markets that traditional media and business channels report on every day. Well known equity indices like the Dow Jones or the S&P500 are good examples of public equity markets. On the credit side, the Treasuries markets as well as Corporate Bond markets are examples of public credit markets.
The private markets, on the other hand, are made up of the aggregate transactions that take place outside public markets, where private institutions and individuals exchange assets, goods and services. Baseline Partners is an active participant of the whole loan commercial real estate market, a piece of the private credit space. Other examples of private credit include mezzanine lending and leveraged finance to small and middle market corporations across the country. Residential mortgages are other examples of private credit transactions, one between private participants (a lending institution and a borrower) on a financial product (a mortgage) that is not listed on a formal exchange (like Nasdaq).
The final piece of the puzzle is the term “bridge.” The private credit market for commercial real estate is made up of countless flavors of loans that are meant to satisfy the various demands of commercial borrowers and their particular needs. These loans are usually characterized by market participants based on duration (long-term or short-term loans), type of lender (banks, government and other financial institutions), type of borrower (operating businesses, real estate investors of varying degrees of sophistication, and individuals), and pricing (low or high rates of interest).
A good example of the above categorization is Conventional commercial loans offered by FDIC-insured institutions like JP Morgan and Wells Fargo to investors with an established relationship and a long history of successful transactions. Other examples of commercial loans are government-guaranteed loans like the Small Business Administration 7(a) and 504 programs designed to help businesses expand operations.
Bridge commercial loans, on the other hand, help commercial real estate borrowers “bridge” the financing gap between purchasing a property or finalizing a project and obtaining long-term, cheaper financing from a larger lender. Traditionally, if a property or borrower does not qualify for long-term financing, like a conventional or SBA loan, borrowers have the option to use a commercial bridge loan for light renovation and/or to obtain a steady level of cash flow (“stabilization”) of a commercial property. These are typically short-term (between 12 – 36 months), higher interest rate (between 6% - 12%) loans used until the property is fully renovated and stabilized.
Bridge lenders exist across the spectrum, from small operators in niche markets originating a few million dollars per year in small geographical areas, usually restricted to their particular states or neighboring states (Texas, South East or NYC tri-state lenders, for example) to national operators originating billions of dollars’ worth of commercial loans like national and regional banks and insurance companies. These loans can range in size from $100K to $30M covering a wide range of commercial properties from the standard asset types (Multifamily, Office or Retail) to more complex properties (for example, Cultural Events, Sports and Medical Facilities, Hospitality and Storage).
Bridge borrowers are simply borrowers that need quick access to liquidity to purchase, rehab or stabilize a commercial property or address some other special situation, as well as opportunistic borrowers with liquidity constrains. In general, the Private Credit market - and the market for CRE bridge loans - is very diverse with a wide range of player sophistication, from individual borrowers to large financial institutions and everything in between.
Author: Mateo Arana, Director - Portfolio Management, Baseline Partners