Originally published in WealthManagement.com 2024 Midyear Outlook
By Maxx Carney, Senior Vice President
We’re in an unpredictable economic environment, and for those of us in commercial real estate financing, this unpredictability is contributing to fragmented capital markets. Most notable for wealth managers and their clients, the banks have pulled back from lending and will cycle into and out of the real estate market as their capital needs change. When banks are actively lending, they’re now more often looking for recourse or a personal guaranty—empowering the bank to look beyond the real estate collateral to the borrower’s balance sheet for repayment in the event the bank ultimately suffers a loss on the loan.
In the face of high interest rates and unreliable bank lending, wealth managers should know about every lending option at their disposal to help clients capitalize their real estate investments. At BWE, we’ve had lots of success placing nonrecourse loans, in which lenders are not permitted to pursue the personal assets of their borrowers outside of the loan collateral in the event of a loss. Often sourced from life insurance companies, the conduit (CMBS) market, and private debt funds, they represent some of the most liquid non-recourse financing sources available to borrowers today.
When working with wealth managers, we often hear that their clients are primarily concerned with minimizing the interest rate but aren’t as focused on the level of credit exposure incurred by a loan. Cost of capital is important, but in this environment, protecting existing assets is just as crucial. Borrowers don’t want to be on the hook for recourse in a slowing economy—with nonrecourse debt, investors can manage the global exposure to their investments, while still securing competitive fixed- or floating-rate loan products for their real estate investments.
It’s true that nonrecourse debt can be incrementally more expensive than recourse loans or limit proceeds, but it’s not uncommon to secure 60-70% loan-to-value ratios (LTV) nonrecourse loans—that’s very competitive, especially considering the lack of a repayment guaranty or recourse.
Given today’s inefficient market, wealth managers will want to give their clients as many lending options possible so that they can feel confident that they’ve chosen the one that best aligns with their business plan, and nonrecourse loans should be among these choices.
For example, we recently worked with a client who went under contract on a retail asset and were working with a regional bank to finance it, believing that to be the simplest execution. It quickly became clear that it wasn’t the case, though; the bank insisted on significant recourse and cash deposits to proceed.
Understandably, they then came to BWE, as they didn’t want to sign recourse and wouldn’t have the required cash without liquidating some of their private banking holdings. In response, we sourced commercial mortgage-backed securities (CMBS) and life company lending options that didn’t require recourse, cash deposits, or bank origination fees—this solved three critical economic and structural issues for the borrower. Wealth managers should be discussing these options with their clients as well.
When it comes to helping your clients invest in real estate, creative thinking is paramount. Rather than a tunnel-vision approach that only prioritizes interest rates and bank lending, wealth managers’ clients should utilize a more expansive toolbox that includes alternative lenders and non-recourse loans. The market might be tough, but a thoughtful approach will go a long way.