News & Press
The Days of Extend-And-Pretend Strategies Are Waning, But Not Quite Over
Excerpted from the article published by Bisnow
Commercial real estate debt is a much more popular investment today than actual real estate. Even large banks, which have pulled back from direct lending in the face of regulatory scrutiny of their loan books, have leveraged private equity firms as vehicles to invest their capital into real estate-related assets.
Investing in the debt rather than the asset helps to avoid some downside risk, said Rob Gilman, who leads the accounting firm Anchin’s real estate group.
“There’s a lot more work that’s being put in on the valuation side of these debt funds to understand what they’re buying and what their exposure is going to be,” he said.
The strategy differs from the popular tactic taken during the Global Financial Crisis, Gilman said, when lenders were frequently providing capital under the assumption that the asset would eventually end up in their hands, referred to at the time as loan-to-own.
That new capital is necessary for most landlords to secure short-term extensions or loan modifications in today’s market, with lenders demanding more concessions from sponsors to unlock new terms.
“The deal’s not getting done without it,” Gilman said. “But on [the lender’s] end, they’re making sure that they get a preferred return, and [the loan] is being structured so that they get the first dollars out.”