On April 11th, G2 spoke with Max Friedman, Founder and CEO of Mandri Capital. Based in Santa Monica, California, Mandri is a full service capital advisory firm socializing in debt and equity for commercial real estate investors and developers. Below are excerpts from our conversation:
G2 Realty Capital: Briefly describe what services Mandri Capital provides?
Max Friedman, CEO of Mandri Capital: Mandri Capital is a commercial real estate capital advisory firm, arranging loans for our developer and investor clients, nationwide. The firm has closed permanent loans, bridge loans and construction loans with a wide variety of lenders, as well as, we have arranged mezzanine and preferred equity and joint venture equity on development projects.
G2: In the last 12 months, how much have commercial mortgages rates increased? What impact have these increases had on borrowers and the lending community?
MF: Just to provide some sense of scale: prime rate is 8.00% today, which is more than double where it was twelve months ago. The federal funds rate has risen in the past twelve months from effectively zero (0.33%) to close to 5.00% today. Our focus is on the rapid rate of the increases (and the accompanying uncertainty), which caused lenders across the risk spectrum to pump the breaks in the second half of last year. Lending markets are now starting to open back up. As a result, Mandri Capital is actively sourcing replacement financing for maturing construction loans and bridge loans on stabilized or pre-stabilized properties.
G2: What is negative leverage and how does it impact returns?
MF: Negative leverage reflects the scenario in which a property’s in-place (typically stabilized) cap rate is below the interest rate of the property’s loan. In this scenario, the mortgage payments can actually cause the rate of return and relative cash flow to investors to decrease.
G2: Do you see capitalization rates expanding and prices reductions, or interest rates reducing to create an equilibrium?
MF: Mandri Capital keeps a close eye on cap rate movements across the markets where our clients are most active. (Primarily in the Western States and the Sunbelt/Southeast.) We are starting to see cap rates adjust across all markets. Our sense is that the rate of increase will be market specific and property specific.
G2: How prevalent were bridge loans in the last several years, and what are some of the challenges those borrowers are faced today?
MF: Mandri Capital has been active in sourcing bridge loans across many property types for our developer clients over the past few years. Given the current run up in interest rates, the challenge in many cases is to secure “cash neutral” permanent takeout loans for projects that have completed construction and are stabilizing. In other cases, we are sourcing “bridge to bridge” loans to provide a sponsor with more “runway” to complete construction or renovations and then stabilize. In all cases, we are performing rigorous lender surveys in order to source maximum leverage for our borrowers.
G2: Where are you seeing distress in the market, and what asset types or borrowers will be most impacted?
MF: The headlines have focused on office as a property type. That said, there are opportunities for enterprising developers and operators in that product type, as well as many others.
G2: What will the next twelve to eighteen months look like?
MF: At Mandri Capital, we always try to “connect the dots” from our daily conversations with capital to what we see in the headlines, so that we can stay ahead of the curve. We are advising clients to secure their refinances sooner than later, as treasuries have dropped in the past month or so. We are working in large part with lenders that offer flexible pre-pays and certainty of loan closing. Our decades in the business and our deep capital relationships allow us the inside track on getting deals funded in any environment.