In April, Zalmi Klyne, a multifamily broker in Los Angeles, scored what he considered a stellar deal.
First Republic Bank had agreed to fund a $14 million fixed-rate construction loan for Klyne’s client at an interest rate 2 percent below comparable options. The offer hinged partly on the $7.5 million the sponsor held with the bank and the borrower’s promise to deposit another $1.5 million.
“It was by far the best offer out there,” said Klyne, of debt brokerage Northmarq.
But then, First Republic balked: Its lenders said it could only fund the deal at a much higher rate, given that it was having to shell out more on government debt and deposits. A week later, government regulators seized the bank and sold its holdings to JPMorgan Chase.
With the collapse of one of the West Coast’s most popular real estate lenders, multifamily players saw their worlds capsize. The bank’s absence has left owners scrambling for a backup plan. Often, they’re coming up empty handed.
Many regional banks have retreated over the last few months, and particularly since March, given fears of contagion after the runs on Silicon Valley Bank and Signature Bank. Owners have looked to life insurance companies and private lenders as alternatives, but private loans are typically a lot more expensive. So some have opted for bridge financing — short-term capital that an owner will eventually replace with a new lower-rate loan.
As to where owners will find debt in the long-term: “It’s kind of to be determined,” said Jay Parsons, an economist at RealPage.
Best coast lender
Prior to its collapse, First Republic was the nation’s fourth-largest multifamily lender, according to RealPage, active in the Bay Area, Los Angeles, New York City and Boston. But its heart — and the heart of its lending business — was in California.
The bank held nearly $8 billion in multifamily and construction loans in the San Francisco area, over $6.6 billion in L.A., about $3.3 billion in New York and $2.5 billion across the rest of California, according to a 2022 regulatory filing. In L.A., where the bank did the bulk of its construction lending, First Republic would often offer a fixed-rate construction loan and the chance to fold it into a longer-term loan with a lower rate.
A construction loan issued with a 6.5 percent interest rate, for example, could eventually become a long-term loan with a 5.5 percent rate, brokers said.
“It was one of a kind,” said Steve Bram, co-founder of L.A.-based debt brokerage George Smith Partners. “They were the only lender doing that.”
“It was one of a kind.”
Other lenders would offer similar deal structures, but only for larger loans in the $30 million to $50 million range. Banks such as Umpqua Bank offered construction loans with a mini-perm loan at maturity — a short-term loan with typically longer terms than bridge financing but higher rates than what First Republic was offering, Bram said.
Kimberly Stepp, who runs multifamily brokerage Stepp Commercial, said she’s seeing more clients turn to private debt.
“We’re seeing lots more bridge financing, which serves as a short-term solution,” she said. Those loans offer interest rates of up to 15 percent.
Overall, industry players say the credit crunch is real, at least in the short term.
“Credit is tightening, just tightening at varying degrees,” said Sarah McKevitt, a real estate analyst at consulting firm RSM.
That crunch is particularly pronounced in the Bay Area, where First Republic reigned supreme in multifamily lending.
Deals in the area had already slowed to historic lows amid rising rates and stricter lending standards. Ahead of the collapse, a Colliers report projected that the “uncertainty surrounding First Republic” would drive investors to look for alternative financing, citing the private lenders L.A. borrowers have turned to and “seller carry back,” which is when a seller acts as a lender via a second mortgage.
When it comes to construction loans for small or mid-size projects, national banks are not going to be the answer.
“None of them play in that space,” Riaz Taplin of Taplin Capital told the San Francisco Business Times. Nathan George of Berkeley-based developer NX Ventures said that most are “too big to be bothered.”
New York, no problem
Coming off the March collapse of New York-based Signature Bank, a failure that pulverized New York investors, First Republic’s failure was not as dramatic for the Big Apple.
“The impact of First Republic on [multifamily] lending in New York City is essentially insignificant,” said Scott Singer, co-lead of Avison Young’s Tri-State debt team.
That’s largely a function of market share. First Republic didn’t crack the top 20 in a PincusCo analysis of New York City commercial real estate lenders since 2020. Signature Bank, by comparison, took the third spot with $13 billion of loans made or refinanced since 2020. And other regional banks, such as New York Community Bank and Valley Bank, and even small scale lenders like Bank OZK and Apple Bank trumped First Republic’s dollar volume.
And the loans First Republic did make carried conservative loan-to-value ratios.
“They were that lower-leverage kind of lender and most of our sponsors were looking for higher leverage,” said Jeff Feldman, a debt broker at Aandar Real Estate Capital.
“You will have heard us say publicly that we too put the client at the center of everything we do.”
Brokers agreed that the loss of two lenders may pose a problem for New York borrowers looking for money now. Fewer lenders means less competition, which gives banks more muscle to set rates.
And the greater hit could be for brokers who saw First Republic as their go-to bank.
“Brokers who only deal with one or two banks may tell you this has been catastrophic,” Singer said. “‘We don’t know where to go, we don’t know who to talk to.’”
Deal-tracker Traded listed Meridian Capital Group’s James Murad and Adam Hakim as the agents who brokered the most recorded loans with the bank — 32 each.
Neither returned requests for comment. However, the site, which only keeps tabs on deals self-submitted by brokers, also showed Murad and Hakim held relationships with more than a dozen other lenders.
A JPM future
First Republic was known for relationship-based lending — give deposits, score better terms on loans. Part of the bank’s charm was its freshly baked cookies for clients on site.
JPMorgan continued that tradition at a late-May investor day, promising cookies once pre-lunch sessions wrapped, an effort to reassure clients it would keep First Republic’s service standards.
“You will have heard us say publicly that we too put the client at the center of everything we do,” said Marianne Lake, JPMorgan’s co-CEO of consumer and community banking, comparing Chase’s level of service to that of First Republic.
Brokers echoed that just as First Republic clients relished their relationships with the bank, JPMorgan’s clients love Chase. But on the West Coast, clients are more skeptical.
“It was almost a perfect bank,” said Neema Ahadian, who heads Marcus & Millichap’s Los Angeles multifamily team. “As of now I’m there, but if the bankers change or the way they do business changes, I would probably move.”
“Is there anyone quite like them?” Ahadian said of First Republic. “I don’t know.”
To what degree Chase’s loan products align with what First Republic offered is yet to be seen.
Days after its investor presentation, JPMorgan told customers with personal credit lines at First Republic it would no longer offer the product when those lines came up for renewal, The Information reported. The bank has also told about 15 percent of First Republic’s employees — about 1,000 people — that they will be losing their jobs and will not be hired back by the bank in any capacity.
First Republic’s flexibility will be hard to match, brokers said. Where the bank might have allowed a condo inventory loan at an attractive rate to a deposit-holder through its multifamily lending platform, Chase likely wouldn’t have the same wiggle room.
“Chase has a very focused multifamily lending business,” said Marcus & Millichap’s Marc Sznajderman. He noted that Chase would likely send a borrower looking for that type of loan to its special situations group, “but that money would be a lot more expensive.”