Private Market Bridging Finance Vs Transition Finance
DO WE DO BOTH? YES!
DO WE HAVE DIRECT ACCESS TO THE PRIVATE
LENDERS? YES!
DO WE HAVE AMPLE FUNDS AVAILABLE? YES! FUNDS AVAILABLE AND PRICING IS ALWAYS A
FUNCTION OF QUALITY, URGENCY, NATURE OF SECURITY, LOCATION, DOLLAR VOLUME ETC
WHICH DO WE PREFER? TRANSITION FINANCE!
WELL THEN, WHAT IS “TRANSITION FINANCE”?
Over the years, I have always considered Little Rock to be in the
business of packaging, preparing due diligence for, and managing bridging
loans. On reflection, this outlook needs refining. There are differences
between “bridging” and “transition” as I define them. Though we operate in both
areas, our preference is to operate in the area of what I now refer to as transition finance, working together to make a deal
ultimately attractive to banks or institutional funders.
What is the difference between “bridging” finance and “transition”
finance, from our perspective in context of private first mortgage lending?
Well firstly, as far as I know, I invented the term “transition” finance.
Secondly it is pricing. Then comes the nature of the security, context of the
transaction and the borrower’s exit strategy.
Let’s be quite clear – we are not talking about short term
institutional loans taken out for a period where a borrower has purchased a new
home before their old home is sold. We do not deal with loans covered by the
National Consumer Credit Protection code. This is not a Private Market
function.
So, does Little Rock provide “bridging finance”. Yes. Generally
the term is for about 3 to 6 months, with a clearly defined exit (including exit
by way of “transition finance” which we may already have in place but for
reasons of urgency, are not able to utilise straight away). Or you may have an
opportunity that is too good to miss - for instance in terms of purchase price
of an asset if you are able to move quickly. Due diligence by the borrower,
broker and lender must analyse the barrier to entry – why is your client able
to buy a particular property at a price well below what someone else would have
to pay. As I have said before, there is always a “back story” and we are
prepared to listen to it. The exit may be by way of genuinely documented on-sale
already in place, or in the case of a borrower who has the opportunity, who
would normally fund through the bank, but urgency and the fact that the
borrower hasn’t completed the latest BAS and/or isn’t able to immediately tick
all of the institutional boxes, means that to “bridge” is a sensible strategy.
So is “bridging finance” our main focus? No. So, again, what is
“transition finance?”
As the Private First mortgage Funding market has evolved, so has
transition finance, which broadly means as the headline suggests, taking an
ugly duckling and turning it into a white swan - a swan attractive to tier 1
institutional lenders. It may be that such interim finance is the means by
which a borrower may exit initial bridging finance. Generally speaking, our
direct lending customers prefer to have their funds out working in first
mortgages for 6 to 12 months, whereas bridging is generally for (say) a 3 month term. At the
shorter bridging end, pricing may be as much as 2 % per month or even more (and
the cost of second mortgages even higher). The purpose may be to immediately
on-sell. This form of bridging finance may also cross-over with what the market
terms “hard money”. It may have advantages, and providing the likely benefits
outweigh the risks, then it is a valid path to take for the short term.
Where it is intended to retain the asset, and for instance, in the
case of a commercial property, the purchaser has recognised that a little TLC
and tenant re-negotiation, can increase both interest cover, and valuation then
that is where transition finance comes into play. Yes, it remains more
expensive than tier 1 lending, but then, in its present condition (and in some
cases gearing), the commercial property is unlikely to be attractive to
institutional lenders. Through transitional funding, Little Rock may be able to
assist during this period, at the same time establishing a repayment history
for the borrower with the owner attending to renovation and increasing interest
cover and/or improving tenant profile.
This is just one example of what I refer to as transitional
finance.
Working backwards, this change in terminology relates to the motivation
(including cost/benefit analysis), desired outcome of the borrower, pricing of
the product, hopefully then allowing the borrower to refinance into a bank or
the like at maturity. Clearly, the shorter the term, the more expensive the
money both in terms of interest rate and the annualised affect of fees.
Little Rock is involved in packaging (including significant due
diligence) and managing loans secured by first mortgages and funded by genuine
private investors. However, what is the ultimate aim of our investors in this
regard? Our investors prefer to have their money in a particular mortgage for
between six and twelve months. Is this bridging finance? In my opinion the
answer is NO. It is TRANSITION finance.
CALL ME AND I’LL EXPLAIN FURTHER ..........
