Opportunity is in the Eye of the Beholder

Mention “mall,” “hotel,” or “land” to many commercial real estate lenders and it will likely be a short conversation – for good reason.

Retail properties have been suffering for years due to the rapid growth of e-commerce. Hotel cash flows can be erratic, particularly when a pandemic comes along, and halts worldwide travel. Land values can fluctuate considerably from year-to-year depending on a host of inputs. Uncertainty is not a friend of the lending community — for the most part.

I’ve always believed in keeping an open mind when it comes to asset classes. Certainly, ACRES makes its fair share of multifamily loans, but we are intrigued by opportunities in out-of-favor properties. Strong sponsorship, a supportable and comprehensive business plan, and an ability to execute on that plan drives our thinking.

Specifically, I like the idea of lending on adaptive reuse projects – especially when local and successful developers are involved. So many properties across this country are obsolete, yet many of those properties – especially older malls and hotels – are situated at “main and main” in their respective markets. Developers local to their markets understand the needs of their communities and typically have a greater ability to execute on business plans given their familiarity with city officials, contractors, and other development partners. Combined with the right capital, cost structure and plan, this usually leads to a successful outcome.

Not all adaptive reuse developments are the same in the eyes of lenders. Projects in need of financing generally fall into one of the following ‘buckets’: 1) > 50% pre-leased to credit tenants; 2) < 50% pre-leased to credit tenants; 3) > 50% pre-leased to non-credit tenants (local operators); 4) < 50% pre-leased to non-credit tenants (local operators); 5) a mix of credit and non-credit pre-leases either more or less than 50%; and 6) 100% spec. Clearly, the most attractive buckets for lenders are those with some level of pre-leasing to credit tenants. On the other end, lending on spec development is nearly non-existent unless some portion of the property will become multifamily or even a self-storage facility. We like to find the “diamonds in the rough’ -- projects not attractive enough for most lenders but possess significant upside potential. The aforementioned ‘buckets’ don’t matter as much as the sponsor and the plan. – Mark Fogel, CEO & President