Bridge & Mezzanine Loans vs. Unitranche Financing: LaSalle Nova Senior Stretch

Our current commercial lending environment is the most competitive it’s ever been. With so many customizable bridge, debt and mezzanine institutions and firms, as well as alternative loan products, lenders are competing for commercial borrowers now more than ever.

However, as institutions and firms with niche products have begun to step up their lending activity, the senior stretch loan hybrid will be the product of choice for real estate professionals and entrepreneurs seeking capital outside the traditional model for the acquisition of equity and debt.

The LaSalle Nova Senior Stretch Loan is a customized hybrid debt instrument that consists of two different financial formulas with different asset-bases as collateral. The Senior Stretch, from LaSalle Nova’s Atlanta-based 35/65 fund, works from both senior debt positions up to between 75 and 85 percent loan-to-value, with a float up to 95 percent based on operational cash flow, serviced from cash flow or sale — this will be determined on a case-by-case basis.

The Senior Stretch Loan is based on the GA (genetic algorithm) model used by large banks and financial institutions. This model provides the framework that will optimize lender objectives when developing a portfolio of complex loans, which will maximize profits and minimize the probability of default or loan fallouts.

This model was developed to guide the decision-making process in a highly competitive commercial lending environment where credit enhancements and constraints are the norm, taking into account the necessity to increase profits for both borrower and lender as well as the need to minimize errors.

Institutions, firms and others engaged in niche lending in the commercial arena who are unable to develop and apply effective management that makes sense for single specialized products often end up in a major credit crisis, resulting in a reduction in the supply of available credit. These major credit events of a negative nature are caused by sustained periods of careless and inappropriate lending activity, lack of due diligence, and the lender’s inability to hold prospects, sponsors and borrowers financially accountable within reasonable means for their own transaction.

The three-point triangle decision model used by LaSalle calls for financial accountability, financial responsibility and project capability, which facilitates efficient, make-sense underwriting and eliminates the time-consuming process of the old model which leverages up the hard assets base to 65 percent with the balance through both mezzanine financing and common equity. The process and due diligence involved in the old model is time-consuming and adds additional out-of-pocket cost for the borrower. The transaction can also be difficult to execute, with three financial stake holders all working within different financing philosophies. In most cases, one or more is absent the internal DNA for such complex transactions.

The LaSalle model, using our simulated and real data process, has achieved results showing increased profits for all parties, fast response time on decision making, and major reduction in sponsors’ out-of-pocket costs.

As part of this, LaSalle developed a new debt calculation using the One Year Constant Maturity Treasury (CMT Rate) and the principals from cash flow mortgage and formed a new hybrid loan structure similar to “unitranche” financing.The LaSalle model eliminates the securitization of financing from multiple sources reducing cost, time and increasing overall manageability.