MHN Interview: The Key to Bridge Lending
Bethesda, Md.—Walker & Dunlop recently provided more than $73 million to borrowers through its Interim Loan Program. MHN talks to Sandor Biderman, senior vice president of Walker & Dunlop, about this program and what type of communities the company is interested in investing in going forward.
MHN: Describe the Interim Loan Program.
Biderman: We started about a year ago with a bridge-lending platform, with the goal of helping our clients who are looking to get permanent financing with Fannie Mae or Freddie Mac, and the property just wasn’t qualifying at that point in time due to some sort of cash flow shortfall—primarily due to lease up and occupancy. The markets kind of evolved since then, and now that we’ve seen the bottom of the housing market and multifamily market, and we’ve seen rents start pointing upwards, we’re starting to see opportunities in which investors are buying properties in markets that are performing well but are underperforming. This is typically due to the fact that the seller has been cash-strapped during the downturn and has not kept up maintenance and upgraded the property to compete with the competition. More and more we’re seeing these acquisition rehab opportunities for clients, which wasn’t what we’d initially set out to do. We’ve since expanded the platform because we think this is a great opportunity to help our clients grow their business, which would ultimately help us continue to grow our permanent lending business in the future.
MHN: Walker & Dunlop recently provided $73 million in loans. Could you describe some of those deals?
Biderman: All those deals are a little bit different, and I think they’re good stories as to what it is we’re trying to do here at Walker & Dunlop. One of the projects was an opportunity that we saw with one of our clients in the Texas market where they had an asset that was student housing close to the SMU campus. It just wasn’t working as student housing, even though they made some significant improvements, including the opening of the George W. Bush Library. There was an opportunity to take that deal out of the student-housing space and convert it over to traditional apartments. It needed some investment; it needed management, and time to execute the business plan. We provided the capital to do that deal. It was unique in the sense that I don’t think we ever put on our brochure that we were doing student-housing conversions to multifamily, but it made a ton of sense. The sponsorship had a good business plan, and that’s really the key to bridge lending—you want somebody to have a good business plan, and you want to do these deals with folks that have executed on similar business plans.
Another of the deals we did was the Island View Apartments, and that was a deal we did in the Washington state area where they had a construction loan that had matured, and they had a lot of recourse on it. The market had been at a low point when the construction loan matured. We stepped in and threw them a lifeline. We had enough confidence that the rent would grow and they’d be able to execute their business plan at the rates they wanted. If you looked at the transaction in a very short window, you could really see that the market was improving. So we gave them a lifeline from their construction loan to give them another year or two so they could achieve their stabilized numbers and either get a permanent loan or sell the property.
Another transaction was Westwinds Assisted Living, and that was a deal that we were going to do with HUD. In many cases, HUD is a wildcard in terms of timing, so that was a case where we helped extend the lifeline for a short-term basis so the client could go out and achieve a HUD loan in whatever timeframe it takes HUD to process that.
MHN: It seems like you have a variety of properties that you invest in—student housing, rehabs, etc. Is there anything in particular you go after, or is it just whoever has the best business plan?
Biderman: We want to be in the same space that the agencies finance—multifamily, student housing, assisted living—so all those products are things we’re willing to do. We like the multifamily space because it has the lowest risk profile, but we like a lot of markets. So I think it reemphasizes the point that if the right business plan works, we’re really making these loans to get to somewhere at a point of time when we can get paid back. We’re not in this for a 10-year, park-the-money, long-term [lending]. We’re in this to help you achieve the plan and pay us off. If we can’t see the vision that you have to pay us off in a couple of years, there’s enough risk out there not knowing where interest or cap rates are going to be, and if we can’t at least understand where your cash flow is going to be, it’s going to be tough for us to do.
MHN: So you’re more interested in the safer investments than the riskier ones?
Biderman: All these investments are risky. We try to mitigate the risk by doing it with the right people in the right location. For instance, if a borrower who has five deals in the D.C. area goes to buy his first property in Philadelphia, it gets me a little uneasy. Do they have a management company in that market? Do they know local zoning? Will they have the ability to process things in a timely manner? A lot of transactions that have these two-year time frames involve a property that is full, and going in and fixing up the units, and then getting them rented back up. Missing that time frame in terms of knowing how quickly people are going to leave the units, whether you can keep people in the units, how much you can raise rents—there are a lot of intricacies that go into it. It’s not a science, and there has to be some thought process in terms of the business plan. A financial model is great, but we need folks to really come to us and tell us what they’re doing. We mitigate the risk by looking at those business plans.
MHN: What challenges do you currently see?
Biderman: The hardest thing right now is really finding the transactions with the right folks and competing with some of the other players—there are a lot of banks out there that you would think wouldn’t shy away from recourse, but more and more we’re seeing banks doing non-recourse deals. But we feel that as you get into the larger space—$50 million and above—it’s tough for the banks to do on their balance sheet, and it’s a smaller competitive set. We expect to be very successful there.