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“Hope is Never a Strategy That Works”: Lessons from The Great Recession and Lending During COVID-19

Sabal, San Francisco, Seattle, Freddie, Fannie, HUD
Image Courtesy of Carl Nenzen Loven

By Meghan Hall

Irvine, Calif.-based Sabal Capital Partners was founded in the middle of The Great Recession of 2008-2009, meaning that in order to survive, the firm had to quickly adapt to the unpredictable to the unknowns of a real estate-led recession. A decade and a lengthy market cycle later, Sabal is now a national firm that has acquired nearly $5 billion in assets on behalf of its clients and investors, and has a dozen offices across the United States. And, while the current economic climate caused by COVID-19 has caused many lenders and financial services organizations to pull back out of an abundance of caution, Sabal has funded every loan that qualified in their pipeline since the beginning of the pandemic—and is looking for even more opportunities to work with borrowers.

“We are a Freddie, Fannie and HUD lender in the commercial real estate space,” explained Pat Jackson, founder and CEO of Sabal. “And the benefit of being a seller/servicer within that, to the degree that we can fund a loan, is there’s market takeout…As long as loans meet the underwriting guidelines, we are actively in the market. Not only are we actively in the market funding our pipeline, but we are signing up new deals because there are loans that with the right amount of structuring can still comfortably qualify as a compliant, performing loan in spite of COVID-19.”

However, while Sabal has continued lending despite the economic uncertainty at hand, there are many firms—even those with a Freddie, Fannie or HUD license—that have pulled out of the market, preferring to lay low rather than test their luck in the market.

“There are many lenders that have just elected to stop lending, even in spite of that liquidity source, for their own reasons,” stated Jackson. “I don’t speak for anyone else but Sabal, but there are obligations that lenders have to the agencies to stand behind the loans.”

Jackson added that if, for example rental collections in June were to decrease, then in the case of Freddie a lender would be obligated to buy the loan back—a large hurdle for firms without the financial wherewithal to navigate those losses.

“Many loans in the pipeline where borrowers were notified that lenders were not going to fund the loan was not because the loan wasn’t performing, or that it wasn’t meeting underwriting guidelines, but because the lender just did not want to deal with the risk right now,” said Jackson. “…It is easy to be a great partner when the wind is at your back. When the seas get choppy is when you really prove the worth of your partnership.”

However, stated Jackson, some lenders’ decision to halt their services for the time being is understandable, given the volatility of the market.

“The reality is the credit markets went nuts,” said Jackson. “In the course of three weeks we went from a bustling credit market to a non-functioning credit market. In all fairness to lenders that are relying on a functioning credit market to execute their business plans, it caught a lot of lenders upside down…badly upside down…The gain that you may make on a loan in normal times would never offset the risk of just making a loan and hoping for the best.”

“Hope is never a strategy that works,” Jackson added bluntly.

For Sabal, its ability—and desire—to continue lending has come in large part from its formative years. The organization was just getting off the ground in the middle of The Great Recession, when the commercial real estate industry at large was faring poorly due to shoddy underwriting practices and low confidence in the economy. From this period of growth, Sabal has evolved its business model in such a manner that the organization continues to fare well, even as the market fluctuates. 

First and foremost among its strategies is that Sabal is not just the seller and servicer for the life of its loans, but also often buys the first B-piece losses when the loans are securitized, believing that a long-term outlook is key for success.

“We have conviction in the real estate,” Jackson emphasized. “As investors we are not just an originator; we take a life-of-loan perspective, and as a result of that, that gives us a lot more durability as a lender in tough times. That gives us more certainty as to how these loans will perform after they’ve been originated, but it also gives our borrowers a much more comfortable touch point as they navigate the same challenges that we’re looking at.”

Over the years, Sabal has diversified its business plan. What started as buying commercial real estate-related distressed debt has also evolved into conduit and bridge programs, and has secured additional sources of capital for liquidity when things are slow.

“We are in the investment management business, so we have long-term, locked up capital from our investors—pension funds and endowments—that allows us to take a patient view of the market,” said Jackson. “…The reality is the market right now has a lot of liquidity shortfalls.”

Sabal has increasingly worked to scale its business over time, and investing early in data-based practices and technologies to alleviate inefficiencies. Early on, Sabal launched SNAP—Secure Next Generation Application Processes—to manage its assets.

“Once you get into the business, you need to get in in a meaningful way,” said Jackson. “Back in 2009 when we started our company, we had a specific business thesis that continues to permeate how we run today.”

All of these efforts are meant to provide flexibility and liquidity as markets “come and go” said Jackson. Long-term, however, Jackson believes things will begin to come back.

“We all have short memories,” said Jackson. “I don’t think [the market] will have an immediate snapback, but I think over time we will find out we can exist and survive, and things will get back to a new normal, whatever that may be.”