Madison Realty Capital - A Private Commercial Lender

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By Daniel Geiger
December 24, 2007

The specialty commercial real estate lender, Madison Realty Capital, has seen a steep increase in business since the summer’s credit crunch put a lingering freeze on the securitized debt market.

"The lending market is about half the size of what it was," said Joshua Zegen, a managing partner and co-founder of the firm. "There have been situations where borrowers have come to us after their lender suddenly backs out, or because they need to refinance debt that is coming due."

The Manhattan based firm made nine loans in November totaling roughly $70 million, double its typical volume months ago before bad subprime loans touched off a wave of devaluations among securities tied to risky mortgage debt and put a crimp on the availability of capital.

The problems in the debt markets have persisted because sellers of securitized debt continue to have trouble pricing the risk attached to the securities. The difficulties have led to a backlog of loans on lender’s balance sheets and has effectively clogged a system whose healthy operation had provided the economy, not to mention the real estate investment market, with the bulk of its financing.

Madison Realty Capital has thrived during the tumult not only because it is a spigot of capital when so many others have run dry, but also due to the firm’s specialization in providing loans swiftly. Zegen said that his company grants loans within a timeframe far shorter than the weeks or even months that lenders typically require before they dole out capital to a borrower. In one of the deals last month, Madison lent $14 million to a borrower to pay off liens on an office building on 30th Street in under a week.

"Usually speed is something that is involved in the deals that we do," he said.

Borrowers who need money so urgently typically are in a predicament. In the case of the $14 million taken on the 30th Street building, the building owners needed emergency funds to rescue the building from foreclosure when they discovered that one of their partners had been drawing loans against the property.

The pullback in lending has contributed to the problems of many because it has tapered the array of options borrowers had during better times to structure their debt in order to bail themselves out of a jam. That leeway has vanished.

In another November deal, Madison lent to the owner of a development parcel in New Jersey who was having difficulty refinancing the parcel’s financing.

According to Zegen, the value of the plot is poised to rise because the area where it is located is being rezoned to allow commercial and residential development. The borrower had difficulty because of the tighter lending criterion that has been instituted since the credit crunch.

Banks are now reluctant to provide loans based on projected appreciation and typically are more conservative about how much of the value of an asset they will finance.

Few senior loans now exceed 75%, a stark contrast compared to the frenzied lending period before the summer when lenders would routinely provide loans up to 80-90% of a property’s value and beyond.

Madison Capital provided the owner with a $26.4 million short-term loan based on the property’s projected value after the rezoning. According to a release issued by Madison Capital, it "evaluated the warehouse’s investment potential based on its location in a gentrifying Jersey City neighborhood and the potential for revenue-producing opportunities in the near future."

Zegen said that the deal will allow the owner time to sell the property after the rezoning or put together a development deal.

The firm specializes in these types of bridge loans that have increasingly come in handy to borrowers in a financial bind. Owners have used short-term loans to hold onto properties until the smoke clears in the debt market and they can secure a more attractive loan by improving the value of the asset or find other sources of capital.

Because of the speed the company is able to use and also because there are less competitors in the marketplace now, it wields powerful returns without having to expose itself to undue risk. Zegen said that the company provides senior loans at rates between 11-13% and that usually don’t cover more than 75% of the value of an asset.

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