A look back: Skadden, Arps, Slate, Meagher & Flom

For Skadden, Arps, Slate, Meagher & Flom, it was much ado about real estate debt funds in 2016.

“We’re seeing an uptick in activity by debt funds and in the formation of debt funds,” said Evan Levy (pictured), head of the New York-based law firm’s real estate capital markets practice.

The pickup in the activity and formation of real estate debt funds in 2016 is largely the result of two factors: debt demand increasing because of growing maturities for loans originated from 2005 to 2007, and debt supply decreasing because of a constrained commercial mortgage-backed securities market. The confluence of these two factors has created a financing gap in real estate, he said.

Risk-retention rules, which are mandated by the Dodd-Frank Act and are expected to take effect on Christmas Eve, have had a substantial impact on CMBS lending. “The uncertainty in the regulatory environment – that’s restrained issuance and restrained lending,” said Levy. “That’s an opportunity for other investors and private equity funds to fill a niche in the market.”

Skadden has seen more activity in debt funds from all three segments of its real estate client base: fund sponsors, real estate lenders and property owners, Levy added. “Fund sponsors are expressing greater interest in forming new funds, lenders see more debt funds bidding on loans, and property owners who are looking for loans are seeing more loan bids from debt funds,” he said.

Generally, there have been two types of real estate debt funds in the market. The first type is focused on acquiring debt that was originated by others, including CMBS, the junior components of which have similar characteristics to mezzanine loans. “Fund sponsors that originate mezzanine loans are finding more attractive opportunities investing in CMBS debt,” Levy said.

The other type of real estate debt fund is one that originates loans. However, it is difficult for a lender to compete only for loans backed by stabilized properties, so sponsors of such funds are also seeking to issue transitional or bridge loans that will be used to help finance the repositioning of properties, he said.