Banks are far more exposed to risky real estate loans than you think — thanks to this loophole

Last February, Slate Property Group and GreenOak Real Estate landed a $285 million loan from the Blackstone Group to finance the acquisition and renovation of RiverTower, the enormous Midtown East rental building. It was a bold deal: although the young Manhattan-based Slate has done around $3 billion in deals in recent years, it had never taken on a single transaction close to this size.

In years past, a bank would have been the most likely lender on such a deal. That Slate and GreenOak instead tapped an investment firm for the debt illustrated how real estate finance had changed in the post-2008 era.

But there was a catch not mentioned in news reports at the time. About a month after the loan closed, Blackstone sold the more senior portion of it to the Bank of China, property records show.

Maneuvers like this are rarely publicized. But they are so common that it’s rare to find a real estate loan issued by a non-bank lender like a private debt fund or a commercial mortgage REIT that isn’t ultimately financed at least in part by a conventional bank.

The practice raises questions about whether post-crisis financial regulations carry teeth. After the government had to bail out big banks over soured real estate loans, regulators set out to reduce banks’ exposure to risky commercial mortgages, such as construction or bridge loans. Using tools such as the Dodd-Frank Act and the international Basel III guidelines, regulators made real estate loans less appealing and more expensive for banks. Banks ceded ground to private debt funds and other non-bank lenders. The regulators, it seemed, had succeeded.

But below the surface, banks are far more exposed to risky real estate loans than commonly thought thanks to a skyscraper-sized loophole: Instead of lending to construction projects directly, they increasingly lend to debt funds and mortgage trusts managed by private equity firms, which in turn lend to developers. Slate insists that the RiverTower deal wasn’t particularly risky, that it came with a big equity buffer and that it gets low interest rates on its loans. But in other cases, such as ground-up construction loans, the risk to lenders is more obvious.  Read More…

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Banks are far more exposed to risky real estate loans than you think — thanks to this loophole published first on http://www.noteseminars.com/