FEATURE ARTICLE, MAY 2006

SITUATIONAL LENDERS: THE EVOLUTION OF HARD MONEY
The lending industry has experienced significant changes over the past decade, especially with situational lending.
Jeffrey Wolfer

“Situational lending” didn’t even exist as a term 20 years ago. In those days, a small group of direct lenders had begun specializing in unique and creative hard-money loans, in part as a kind of response to the lack of flexibility and speed in the lending market. These lenders always had been known as traditional hard-money lenders in a capital environment where interest rates were higher and people were often borrowing out of distress. After all, this was the late 1980s. Real estate values were eroding, airlines were in serious trouble, banks were in crisis and borrowers had few alternatives other than going to hard-money lenders.

These were the “lenders of last resort” when money was as tight as it was in that era. But, even from the beginning, situational lenders did things differently. They began to distinguish themselves in two distinct areas: flexibility and speed. They saw a need in the marketplace for creative financing that could overcome the obstacles imposed by traditional lending institutions and conventional loan requirements.

This was prior to the concept of creative financing. Securing a loan during foreclosure or bankruptcy, for example, was often quite a challenge, exacerbated by the hurdles put in the way by banks and their seemingly never-ending stream of paperwork and delays. Which banks could deliver a loan in 5 days or less? A small but growing group wanted to offer viable alternatives.

These lenders decided that the solution was to provide options that would guarantee not only an alternative money source, but also extraordinary speed in closing the loan. This approach quickly became successful and popular, and today this type of lender is recognized as being able to quickly close some of the toughest loans out there. Loans between $1 million and more than $100 million that could otherwise take weeks are concluded as quickly as 5 days, with some loans even closing in just 48 hours.

Situational lenders have to be creative in their approach, and one of the ways in which they do that is through their philosophy concerning raw-land loans. Most banks and conventional lenders are hesitant to consider raw land as collateral, but some direct, situational lenders embrace it. Whether it’s beachfront property, non-performing inner-city buildings, an amusement park, resort, airport or condominium complex, situational lenders see the value in the client’s vision. Situational lenders routinely make commitments even with raw land as the only collateral, which reflects a kind of speed and flexibility necessary in today’s market. And no two loans are ever the same. One day a firm can lend money to clean up 1,000 acres of contaminated land slated for development and the next day they’re helping a non-bankable land developer build two championship golf courses in the Arizona desert.

Because most are direct lenders, situational lenders’ hands aren’t tied by outside investors or traditional requirements such as ratios and other cookie-cutter criteria. Today’s lenders will consider unusual and innovative types of collateral, liens and other positions to secure a bridge loan or other equity-based loans in order to facilitate a client’s financial goals. This emphasis on raw land as collateral and innovative ways to finance represents a change to the traditional business model. Today’s situational lenders will look at pretty much any deal that seems viable. Income-producing property, better collateral and more equity, coupled with lower interest rates and high property values, all have caused distress loans to evolve into time-of-the-essence loans. The bridge loans that lenders routinely make are really about opportunity. Thus, hard-money lenders have likewise evolved into situational lenders. If someone has a chance to purchase real estate, they may go to a traditional lender, such as a bank. But then, as time begins to run out, the proverbial ‘D-Day’ starts to loom on the horizon, and the traditional lender can’t close the deal in the required timeframe. What is the borrower’s alternative? Going to a situational lender.

Because there are now more competitive rates, situational lenders have been attracting a wider array of commercial mortgage brokers, and more partnerships are being formed between situational lenders and this steadily expanding group.

For example, Buena Vista Corporation wanted to move into Orange County, Florida. The 214-acre tract known as Marbella is located just a few miles from  Disney World. The land was zoned for mixed-use, and Buena Vista was completing plans for the site. The first phase will include a condominium-hotel, proposed high-end retail center, timeshare units and vacation homes. The size of the property and popularity of the area creates tremendous potential in the land, but the borrower needed to move quickly to take title to the property. With a very short window in which to close, Meridian Capital Group, one of the nation’s largest brokerage firms, brought the $40 million loan to a situational lender, which understood the urgency and was able to do something about it.

Today, deals of this type are not that uncommon. Everything depends on the value of the assets. Situational lenders look at every possibility very closely, then make a decision based upon value and on debt to be repaid. Borrowers come to a lender because of its reputation in the industry as a company that recognizes real value and can deliver extraordinarily fast. Usually, creativity is what makes a company’s deals work. Situational lenders can close virtually any deal because they offer flexibility in loan configuration, specialized attention and quick turnaround for most any type of property. These lenders base loans primarily on an asset itself. It depends on the deal and where it is. Situational lenders will do nearly any commercial property type and do it quickly.

Situational lending institutions continue to offer innovative strategy and insight in making some of the fastest loans in the industry, despite what the market may or may not do. The real estate market is staying up right now, people are still developing property and the market itself is sound. The market recognizes the need for the flexibility, creativity and flat-out speed that situational lenders offer.

Jeffrey Wolfer is president and co-CEO at Kennedy Funding.

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