No Cash Flow, No Problem

No Cash Flow, No Problem

Capital is flowing back into the commercial real estate space with non-bank lenders becoming significantly more active as the recovery continues. Banks have even begun to step back into the bridge/transitional lending arena.

While non-regulated lenders have more freedom in their lending decisions than their bank counterparts (due to the increased regulations that impact the latter), most of each are still actively looking at a property’s in-place cash flow as a key loan decision factor. In-place cash flow is important because it’s often viewed as a property’s base-line capability to perform over a period of time in the future.

However, some lenders have begun to look beyond in-place cash flow, especially when dealing with value-add opportunities and properties in transition. This select group of debt providers usually includes those with significant expertise in real estate, as well as a deep understanding of local real estate markets and drivers of value. These lenders are able to assess the likelihood of a property’s performance based on other variables and are perfectly comfortable taking on a deal with weak historical cash flow, especially with a proven sponsor and well conceived business plan in the mix. 

As one could guess, the non-regulated lender is more apt to lend on properties with no cash flow because they are not stymied by banking legacy issues or regulations. These debt providers look at functionality of the improvements, strength of the location, “opportunities” in the rent roll, the state of competing properties in the submarket, and, of course, the borrower’s reposition plan and likelihood of its ability to execute.

When these factors line up, cash flow may be disregarded for the right opportunity. The bottom line? Cash flow is and will always be “king” as driver of value of commercial real estate investment property, but for properties in transition, it is future cash flow that matters most. 

Jim Martin is director of Sabal Financial Group's Commercial Real Estate Bridge Lending, offering financing for value-add opportunities and properties in transition.