Homebuilder Michael Solimando had already poured his own money and sweat equity into a Scituate project where he was planning to build 14 luxury townhomes, creating a marina on South River and driving the piles to prepare for construction, when the money ran out.
Like most builders in his position would, he went to a bank to apply for a construction loan. After one rejection he went to another, and another, being roundly rejected for the funds to complete the project in the Humarock area of town.
“I must have gone to 20 different banks for conventional lending,” Solimando told Banker & Tradesman. “They just threw their hands up in the air and said they’re not doing luxury townhomes.”
That is no surprise, given the luxury condo market had just crashed hard during the recession, and homeownership was in the dumps. With no one else to ask, Solimando, president of Milton Corp. construction company, based in the firm’s namesake town, turned to a private lender for a bridge loan.
Bridge loans are, in essence, much like a traditional bank loan. But there’s one key difference: usually, the interest rates are high. Very high. Oftentimes, the interest rate is double that of a bank loan. But cash is king, and when developers can get a non-traditional bridge loan fast, the profits from what they build with that money can make the high interest rates involved seem negligible, especially if the banks are unwilling to open their wallets.
So Solimando turned to a firm, the Quincy-based Grossman Cos., which his father, also in construction, had worked with when the Grossmans were still in the lumber business. Grossman, which had dabbled in private lending in the past, recently beefed up its bridge loan offerings under affiliate First Boston Capital Partners.
From the day he presented the residential project to the Grossmans, it took less than a month for Solimando to secure about $1 million from the firm, better known locally for acquiring and rehabbing troubled commercial real estate than for handing out loans. Then Solimando got another $1.2 million from First Boston, and another loan for $900,000. He has already paid off the first two loans and is working on the third. Seven of the 14 townhomes have been built, and all seven have already been sold for between $695,000 and $875,000.
“You don’t have to go through all the bureaucracy like you do with a bank,” Solimando opined. “It was just more streamlined. The banks will keep you on the line for two months, and then when they don’t [lend the money] you have to start it all over again with another one. It’s a pricey loan, but if you’re convinced about your project and can deal with those parameters, it’s the most convenient way to go.”
Cash Rich
The Grossman team is certainly not the only private lending firm in town. Companies like Endeavor Capital and Wallace Capital, both Boston based, also offer bridge loans. But Grossman is a known real estate acquisitions and development firm. However, the company pretty much quit that game from 2005 to 2010, looking at the market for commercial acquisitions and deciding the valuations were unsustainable, said David Grossman, who heads up First Boston.
“We were not an active investor or buyer of real estate from 2005 to 2010, or a lender,” Grossman told Banker & Tradesman. “As a result we really just sat on the sidelines, building up equity by paying down debt. “After that, it was a natural time to start hunting for opportunities and good, quality builders that couldn’t get capital because banks weren’t lending or because they had capital issues.”
Just like a bank, the firm tries to find quality borrowers that will come back for repeat business. But, Grossman said, his company can move a lot quicker because they aren’t regulated like a bank.
“So I can meet them at the property, see the project, leave and in an hour, say ‘here’s the financing we can offer,’” Grossman added. “We’re lending against an asset class we know and understand. It’s not rocket science. By lending predominantly our own capital, it gives us flexibility to make loans we think are good investments.”
While the interest rates are high – 12 to 15 percent on average, according to the firm’s website – borrowers are representing themselves as cash buyers, so they can buy property less expensively than someone without all-cash.
“And in the current economic climate, we have a lot of interested parties, or they’re already sold on the idea,” Grossman said.
It’s A Niche
This certainly isn’t the first time a real estate firm has gotten into private lending, but there aren’t many other CRE firms currently in the business, said David Begelfer, who heads NAIOP Massachusetts, the industry’s largest advocacy group locally. It makes “a lot of sense” for Grossman, especially, to lend on development projects. It’s a solid business if the lender is willing to deal with the potential downside – foreclosing and taking ownership of a property.
“It’s not like getting into banking and lending to startup companies,” Begelfer offered. “It’s an industry … they have a long history with, so that takes away some element of risk. They’re not looking to compete heavily with banks or investment funds, but they usually find niches.”
In many cases, the properties being purchased and redeveloped with the bridge loans simply could not be financed through traditional avenues because they’ve been foreclosed and have possibly years of deferred maintenance, according to Michael Rubin, an attorney with Posternak, Blankstein & Lund.
Many developers that were “badly tattooed” during the recession and couldn’t borrow conventionally to do these kinds of deals, and their credit weakness forces the banks to pass on financing their projects. So the only place they can go is for this kind of financing are firms offering bridge loans, Rubin said. And despite the high interest rates, developers often pocket a cool 20 percent profit after rehabbing and selling such distressed properties, he added.
Email: jcronin@thewarrengroup.com
