Commercial real estate development is booming in Pennsylvania and around the country. Big cities like Philadelphia, Miami and New York are seeing a surge in the construction of office buildings and luxury rental properties, while other areas are experiencing a demand in shopping centers and warehouses. However, the Federal Reserve has repeatedly issued warnings about a potential bubble, and the Office of the Comptroller of the Currency has increased its scrutiny of CRE lending practices of commercial banks and forced some banks to increase their reserves. This has caused many financial institutions to cut back on their portfolios.
As a result, lenders that are not subject to these regulations, such as hedge funds and buyout firms, have stepped into the breach. It has been estimated that these entities, often referred to as “shadow banks”, are poised to invest more than $30 billion into commercial real estate projects. One research company has noted that the amount of financing provided by these entities increased by nearly 40 percent in July 2016 over that invested by them a year earlier. While the interest rate charged by these firms to developers is usually higher than that charged by a bank, the upside to a developer is that a project is often given the green light in a shorter period of time.
Regulated banks are still involved in this sector, although in an indirect way. Loans by such institutions to these unregulated financial companies increased by more than 20 percent in the fourth quarter of 2015 compared to the last three months of 2014.
Due to the reduced bank lending, some commercial real estate developers that have projects on the drawing boards or that need to refinance existing loans may want to turn to these alternatives. They may also want their attorneys to review the proposed loan documentation, which may in many cases contain some different provisions than the bank agreements that they are familiar with.
