Silver Hill Funding’s Leslie Smith is Targeting the Underserved in the SBL Space

“We did a test run last year as we really wanted to understand our competitors, the space, where we’re going to find these borrowers and also if they even exist,” Smith said. And, exist they did.

Commercial Direct’s lending strategy targets small business owners, entrepreneurs and investors who are relatively new to the commercial real estate arena or are looking to expand or diversify their portfolios. The platform finances commercial and residential condominiums, among many other asset classes, and closes loans in 30 days or fewer, according to Commercial Direct’s website.

With the backing of Silver Hill—which has funded more than 20,000 transactions since its founding—and Bayview Loan Servicing, the platform is off to a strong start.

Commercial Observer: When did you join the Bayview family of companies?

Leslie Smith: I joined Bayview in 2004, so for quite some time I’ve done a variety of things under the Bayview umbrella. I started off in originations and then worked my way to the Silver Hill brand [which launched in 2016].

Tell us about Commercial Direct. How did its launch come about?

Bayview has a very deep knowledge of commercial lending. What we thought was, 10 years [after the financial crisis], the world has changed and people have changed—in the way they gather information and how accessible information is. We have to really rethink the business and [enter] that space. What I mean by “that space” is direct lending through Commercial Direct. We felt there was an opportunity there. Our target [loans] are from $100,000 to $2 million, and we’re targeting that small business owner who’s really unable to get traditional financing through a bank or a government agency because of a variety of [reasons].

Commercial Direct has gone up as high as $5 million in the small balance loans it provides. Does your reach expand on occasion?

We do go up to $5 million but from a retail perspective, that’s rare. Those types of loans usually are more of a brokered type of deal, versus an individual searching online. Our sweet spot is about $450,000. That’s where we see most of our loan requests. Not only are we providing a platform for people to go get a commercial loan on their own, but we allow borrowers to customize that loan and create a product that fits where their business is currently. When you think about a commercial loan—getting a traditional loan—those boxes are pretty predefined with loan terms, amortization and rates and what have you. I think that the fact we allow people to customize those features gives them the flexibility they need to run a small business.

What terms does Commercial Direct typically offer?

We go up to an 80 percent LTV [loan-to-value] and our rates range from 6.5 to 8 percent, depending on the credit rating. We also lend on property types that a lot of traditional lenders do not. Yes, we do multifamily and we might see office deals, but we also do self-storage, we do warehouses and automotive, or mobile home parks and bars and restaurants. When you think of a small business owner, we might have a guy who’s a mechanic and who owns his own business. Those, at times, aren’t really a property type that traditional lenders are interested in doing.

Are your loans full recourse?

For the smaller loans. We do nonrecourse for larger loans on a case-by-case basis, depending on how stabilized the property is. The term is typically two to five years. Typically, people like that three-year prepay so they like a three-year loan where it’s a declining prepayment. It gives them time to stabilize their assets, and it’s not short enough where they have to get refinanced out every year. That becomes very expensive and very stressful for a small business owner.

Being that there are no brokers involved or any intermediaries, is there a human element lacking in guiding customers through the borrowing process?

I think we’re in an age where people really want some independence and want to steer, but if at any point a borrower wants to raise their hand for guidance, our loan officers are there to step in and help through a transaction. Commercial real estate can be very complicated, and a lot of borrowers we see are very new to the space. So, yes, we have a knowledge base and a great website, but the human element is important for something that is completely new for people.

Who are your competitors?

I’m not looking at Fannie Mae or Freddie Mac or the Arbor [Realty Trust] of the world because they have a very defined box of who’d they’d like to see—the type of borrower they like, the type of property they like and even location.

My borrowers would all probably be turned down by those institutions. My borrowers want to use their real estate for the loan, versus going online and getting an unsecured loan you can get really quickly. My borrower is someone who’s been running their business for a long time and really can’t necessarily show the income necessary for traditional borrowing. My borrower is one who’s maybe new to an investment property; institutional lenders aren’t comfortable taking a chance on [someone like that]. My borrower is one who has already gone to their bank and was told no. My direct competition is not necessarily [those larger entities], but it’s really about the person, the borrower and what they need the cash for.

Our biggest competition is the smaller, regional banks and credit unions. When we’re talking about a small business in a small town, it’s not the online lender I’m losing business to but rather the banker who knows that community really well. Having said that, we are a national lender and recognize market variances very well because we partner with our borrowers. Ultimately our flexibility is our unique strength.

How have you been able to carve out your own space in the market?

Leveraging the history that Bayview has in the space—most definitely—and also understanding that we’re a non-bank lender and we’re not going to have a lot of the restrictions that a bank would have.

The small balance loan arena has been growing. What are you seeing in the space?

I’m looking for people to be much more savvy. People have access to so much information. So, I expect to see more investors and more new investors, the people who may have one property in their portfolio, have had some success and are looking to add to that. I’m also expecting more graduates. What I mean by that is over the last three or four years, there have been a whole world of people who have been fixing and flipping properties. I think those people, they’re graduating into bigger projects and larger investments. They’ve probably already tried the broker side; they’ve probably gone to a couple of different lenders to grow their portfolio. So, I’ll see that kind of mid-maturity investor come to us.

How has the small balance loan space evolved over the last few years?

I think there’s a lot more opportunity to invest. It’s no longer people trying to do some deep search into how they start a venture; there are conferences [throughout the year] surrounding people with [different strategies and outlooks]. It’s kind of this thing that happened silently and now it’s a huge part of our economy.

Ten years ago, a lot of your nontraditional investors weren’t investing in this way and may have never even thought about doing it on their own. I think our platform fills that void. People now feel that not only can they invest in real estate but maybe they’ve been running their business in a small strip mall for 20 years and now they think, “why can’t I buy this? I already have a couple of tenants.” That kind of conversation in a good economy is what’s happening, where people feel it’s a possibility.

How have the first few months been since Commercial Direct launched?

We’ve [gotten some good loans] under our belt [in just a few months] and we’ve gotten some really good feedback about the platform itself, so that’s very promising for a business that’s online and sometimes doesn’t have a human face to it. I feel encouraged by that and I feel encouraged by those that have come back to us. So, not only do we have people who have had good experiences, but they’ve come back to us with another property they’d like for us to lend on. It says a lot about the platform and the experience of the borrower.