Unpacking the Details of a Recent Lending Transaction:
Recently, I came across a LinkedIn post from a senior executive at IPA Capital that caught my attention due to the specific metrics used to describe a transaction. While industry experts might immediately understand these details, I wanted to take this opportunity to break down and digest this information to better understand the lending process as described by Gary Mozer at IPA Capital Markets.
Gary Mozer at IPA Capital Markets posted details on construction lending conditions:
Demystifying Lending Metrics and Market Conditions in Today’s Financial Landscape
In the original post (since edited), the following metrics were provided: It took reaching out to 87 lenders on behalf of a client to receive the following terms: Loan-to-Cost (LTC) Ratio: 62.5%; Nonrecourse Loan; SOFR +3.50%; No Deposit Requirement. Let’s break down what that means:
Efficiency of Capital Markets
Current: Capital markets are described as grossly inefficient, requiring outreach to a large number of lenders.
A Few Years Ago: Capital markets were more efficient, and finding suitable lenders was easier and required contacting fewer lenders.
Loan Terms
Current: The terms, such as a 62.5% LTC nonrecourse loan at SOFR +3.50%, indicate lenders are more conservative and demand higher premiums for risks.
A Few Years Ago: Loans with higher LTC ratios (70-80%), nonrecourse, and lower spreads over benchmark rates (e.g., LIBOR + 2%) were more common.
Leverage & Risk:
Current: Lenders are more risk-averse, often requiring lower leverage, recourse, and deposits.
A Few Years Ago: Lenders were more willing to offer higher leverage, nonrecourse loans, and had less stringent requirements for additional guarantees or deposits.
Interest Rates:
Current: The reference to SOFR +3.50% reflects a higher premium over the benchmark rate.
A Few Years Ago: Interest rate spreads were generally lower, reflecting a more competitive lending environment.
Summary
In today’s financial climate, the loan terms of 62.5% LTC nonrecourse at SOFR +3.50% with no deposit requirement are relatively competitive given the inefficiencies and increased risk aversion in the capital markets. This contrasts with a few years ago, where it was easier to secure higher leverage, nonrecourse loans with lower interest rate spreads and fewer additional requirements. The shift indicates lenders are now more cautious and demand better risk coverage due to increased market uncertainties.
