How Fulcrum Lending’s Products Are Optimized For Today’s High Rate Environment

One of the great challenges in the lending space today is figuring out the exact best products to serve the needs of both borrowers and the capital markets.

Fulcrum Lending, which emerged in 2022 and has since raised $300 million for commercial real estate financing with a concentration on multifamily, has reason to believe it has successfully deciphered the mystery.

In a recent filmed discussion with Commercial Observer finance reporter Brian Pascus, Maxwell Wu, Fulcrum Lending’s co-founder and CEO, introduced his company, and explained how Fulcrum has developed products that have contributed so successfully to CRE financing in these truly challenging times.

As Wu tells it, Fulcrum Lending is a specialty credit management platform focused on multifamily credit that was designed with an extended high rate environment in mind. The firm lends across the country and is filling gap financing needs brought on by the rise in interest rates.

“We serve the market by combining private credit with core capital,” said Wu. “We are able to offer borrowers a blended cost of capital that’s accretive for today’s needs, so that borrowers can ultimately refinance into conventional long-term debt in the future.”

Fulcrum helps borrowers roll loans in an accretive way with beneficial term and structure, starting with its five-year fixed rate senior stretch product.

“When we created this firm, we had a vision that rates would be higher for longer,” said Wu. “There was a tremendous amount of capital printed during COVID that ultimately led to an abundance of liquidity in the markets that has been really hard to shake out. For every $3 in your pocket, one magically showed up. That’s the story of inflation. When you look at the market today versus five or 10 years ago, structure matters more than ever.”

Wu notes that the time of COVID saw increased volatility, an abundance of margin calls, and a slew of disruption in the capital markets.

“That’s really a story of short-term funding on long-term assets, and it’s a concept we know well,” said Wu.

These issues caused Fulcrum to spend their time thinking about the best ways to construct a durable liability structure.

“We’ve created a unique product that not only fits what borrowers want, but also what the capital markets investors want – what bond investors want,” said Wu. “Deciphering what those parties need and want was the hard part. But that’s what we figured out.”

Next, Pascus shifted the discussion to drill down on the specifics of some of Fulcrum’s products, starting with the unique five-year stretch senior product the company created around two years ago.

Wu said that when they first introduced the product, some investors had a hard time understanding the exact nature of the need for it on the part of borrowers. Wu explains that this is because conventional thinking in the industry mistakenly expected the high-rate environment to be short-lived. 

“We went from essentially zero to +4 percent in a short period of time, and that caused a lot of disruption,” said Wu. “When you look back to 10 or 15 years ago, you could reliably refinance loans and take cash off the table once you create value at the property.”

When the cost of capital rose, however, proceeds weren’t recognizing value.

When Fulcrum thought about how to recognize the value that borrowers created, it was a matter of matching leverage to value and being able to do so in a constructive way with an appropriate cost of capital.

“What we believe is, to be a lender, you need to meet the market where it is and serve the needs that borrowers have today,” Wu said. “We need to be able to translate what this unique credit product is, and offer it to bond investors to purchase and invest in. Being able to connect those two is key in funneling a low cost of capital, or a creative financing, downstream to borrowers for what they need today.”

Pascus then expanded the discussion to address Fulcrum’s proprietary technology, and how they have put this to use to serve the company’s borrowers.

“The way I look at it, it’s about how do you distill and synthesize information quickly, so we have as much data as possible to make the best decisions possible,” said Wu. “When you are able to connect that throughout your platform, all the way from origination to servicing, then you have a vertically-integrated, totally connected platform that knows the health and performance of an asset at the ground. Our investors — bond investors, and especially foreign capital — want to know what’s happening on the ground. So being able to create a product that goes all the way down to the real estate, so investors know exactly what’s going on, that is the unique aspect. Information is ultimately what de-risks investment and ultimately lowers the cost of capital.”

Later in the discussion, Pascus mentioned how volatility has expanded with the growth of private credit, and asked Wu how Fulcrum managed to avoid that volatility in the midst of such a large private credit ecosystem.

Wu noted that in thinking about the structure around volatility, duration was paramount.

“You have to think about how you match term fund your assets and your liabilities,” said Wu. “Many lenders in today’s market still operate under structures that were set up five, 10, 15 years ago: short-term lines of credit, long-term loans, and relying on securitization to turn that capital and ultimately pay back that short-term funding. The unique approach we’ve taken is that we’ve taken five-year liabilities and matched them with five-year assets. Not only does that provide us greater stability as a business, as an enterprise, and as a platform, but it also provides borrowers with a more stable source of funding. When I think about how we differentiate ourselves today — not only for borrowers, but also for our investors — I think about making sure that we are not at risk for these margin calls that are at risk of having loans hung on our balance sheet.”