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Why Alternative Lending is Here to Stay

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According to veteran mortgage executive Jack Taylor, alternative lending is not a fad. At a seminar on the rise in alternative lending sponsored by the Commercial Real Estate Finance Council in New York, Taylor described the debt markets as a “slow-moving structural arbitrage,” and went on to say, “It’s a terrific time to be an investor in commercial real estate debt in the U.S.”

Taylor said that the sector owed its growth to the strong demand for debt financing at a time when banks and Commercial mortgage-backed securities (CMBS) programs were being squeezed by regulatory pressure and the influx of foreign capital looking to invest in U.S. real estate.

According to Commercial Property Executive, “The uncertainty around lending of highly regulated banks and the volatile CMBS sector has led to a large increase in capital raised for specialty lending platforms. Commercial Mortgage Alert earlier this year identified managers of 64 funds raising $66.7 billion in equity for debt vehicles. The amount being raised for debt funds was a record, topping the previous high of $52.1 billion in 2015.”

Taylor said this is not just a short-term trend and as long as the regulations are in place, there will be a need for alternative lending.

“This is not a one-year trade born out of a capital need,” Taylor said. “What’s happening is that regulators are forbidding the ‘other-people’s-money trade.’ Banks can’t put other people’s money at risk. … I don’t see that changing.”

According to Bloomberg, “Nonbank lenders have more flexibility in managing and evaluating risk. While banks are required to hold a certain amount of cash against the commercial real estate assets on their books, investment firms make their own rules when it comes to setting aside reserves for potential losses. They use internal rating systems to analyze the soundness of their loans.”

There are many investments out there that banks will not even consider funding but with the help of alternative lending, there are many opportunities.

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