Real Talk: Real Estate Discussions with Andrew Kirsh

Episode: The Current Real Estate Lending Market with Jerry Dunn, Co-Founder of A10 Capital
Date: December 21, 2022
Guest: Jerry Dunn, CEO & Co-Founder of A10 Capital

Episode Overview

In this insightful episode, Andrew Kirsh sits down with Jerry Dunn, CEO and Co-Founder of A10 Capital, to break down the rapidly changing real estate lending market as 2022 draws to a close. They dive deep into the evolving state of bridge and permanent lending, discuss the challenges the industry faces in light of rising interest rates and liquidity crunches, and reflect on how lenders can remain competitive and nimble. Jerry shares his perspective on underwriting in today’s environment, the types of deals moving forward, industry cycles, predictions for 2023, and unique tidbits about building a national lending platform from Boise, Idaho.

Key Discussion Points & Insights

1. A10 Capital’s Background and Market Niche

• Boise-Based with a National Reach:
  • The company is headquartered in Boise, Idaho—what Jerry calls "the other financial capital."
  • Started after Jerry’s background in Wall Street banking and specialty finance, having experience building finance companies during market disruptions.
• Product Suite:
  • Primarily a bridge lender, funding transitional properties typically in the "lease-up" phase—from vacant to stabilized occupancy.
  • Bridge Loans: $5–$50 million, 3-year terms, 0% to 80% occupancy at funding.
  • Permanent Loans: Added a fixed-rate product to serve stabilized assets (90–95% occupied, 7–15 year terms), positioned as an alternative to CMBS with in-house servicing.

2. State of the Market as of Late 2022

• Market Activity:
  • Early 2022 was extremely busy; post-summer, transaction volume dropped sharply due to rapid interest rate hikes.
• Bridge vs. Permanent Volume:
  • 2021: ~60% Bridge / 40% Permanent ($1 billion total).
  • 2022: Was on track to surpass 2021 until market stalled mid-year.
• Deal Flow:
  • Recent spike in end-of-year loan requests—mostly deals that need to close by year’s end or maturing/refinancing loans.

“The second half of this year is much slower than the first half. Not to say that if we kept the pace of 2021... we would all be, you know, in our graves.”
— Andrew Kirsh (07:59)

3. Lending Environment and Strategy Amid Volatility

• Competitive Edge:
  • Unlike many debt funds or mortgage REITs, A10 does not rely on repo facilities, avoiding margin calls and staying operational in volatile times.
  • Proven history of lending through disruptions (e.g., COVID, Great Financial Crisis).
• Current Underwriting and Lending:
  • Active on both bridge and permanent, focusing on high-quality sponsors and selective asset types.
  • Bridge pricing used to range from high-3% to low-5% coupons pre-volatility; now rates are higher due to cost of capital.
  • Cashflow is now a more significant determinant of leverage than LTV, especially with higher rates.

“We constructed our balance sheet… so we actually flourish at times when the market pulls back.”
— Jerry Dunn (11:13)

4. Underwriting Changes and Risk Appetite

• Shifts in Focus:
  • Lenders now more concerned with cashflow coverage ratios, less with LTV (“loan-to-value”), as higher rates constrain proceeds.
  • Selective on office; “extremely selective” on sponsoring and submarkets, careful on rent growth assumptions in multifamily as rent growth moderates.
  • Sticking with non-recourse loans; capex and lease-up facilities remain standard.

“Almost nothing ever goes as planned in a bridge loan… just having someone to talk to is important.”
— Jerry Dunn (27:28)

• Extensions on Existing Loans:
  • Will extend loans for borrowers executing on their plans.
  • If business plans slip, requires borrowers to recommit additional capital before granting extensions.

5. Dealing with Increased Competition

• Saturated Market:
  • Many new “debt funds” with minimal platforms; A10’s first-mover advantage, in-house servicing, and robust origination/servicing capacity are key differentiators.
  • Strong repeat borrower base (20–30% annually).
  • Market has enough volume in good times; in market downturns, A10 can weather the storm better than over-leveraged newcomers.

6. Market Cycles and Future Predictions

• Liquidity Crisis Concerns:
  • Current market conditions mirror the post–Great Financial Crisis era with almost non-existent debt capital markets.
  • Predicts some lenders will exit the market due to structure vulnerabilities (e.g., reliance on repo/capital markets funding).
• Rapid Change:
  • Noted how swiftly the market shifted, faster than any previous downturn in his career.

“If you actually put it down on paper, it’s the fastest I’ve seen something move for sure.”
— Jerry Dunn (29:44)

• Looking Ahead:
  • Expects to see need for “rescue capital” and capital stack resets (e.g., stretch senior debt, new equity, creative structures) over next 6–12 months.
  • Budgeting for 2023 is difficult; deal flow hinges on interest rate stability and market clarity rather than volume predictions.
  • Skeptical that rates will drop quickly: “I’m expecting they’ll be held up for a while to really slow things down.” (34:28)

Notable Quotes & Memorable Moments

• On Starting A10 During a Crisis:

  • “We sort of started A10, right before the Great Financial Crisis... we had dry powder, and it really helped us kind of get into the market.” (03:20)

• On Surviving Market Disruptions:

  • “During COVID... a lot of our competitors got put on the sideline... We were actively lending during that period of time. Same here. So we are actively lending on bridge.” (12:10)

• On New Lenders and Relationship Advantages:

  • “Unlike some of the Johnny come lately debt funds... we have an entire origination team, maybe as important, we have servicing in house. For bridge loans, almost nothing goes as planned and we found just having someone to talk to is important.” (27:28)

• On the Company’s Name:

  • “A10 Warthog is a... very cool attack airplane... but the real answer is it’s hard to find a website with a name that’s available... we thought A10 sounded cool.” (23:45)

Timestamps for Key Segments

• Intro / Market Context – 00:40–02:14
• A10 Capital’s Origin Story – 04:44–05:40
• Overview of Loan Products – 04:16–05:40
• Impact of Rate Increases & Market Activity – 06:24–09:08
• A10’s Funding Model & Staying Active – 11:13–13:13
• Underwriting Shifts & Selectivity – 14:55–16:38
• Loan Extensions Strategy – 18:16–19:09
• Backstory: Starting A10 During the GFC – 20:22–23:39
• Competition & Advantages – 26:37–28:36
• Market Outlook (2023 and beyond) – 29:05–34:52
• Boise, Idaho as HQ and Market – 34:52–36:42

Conclusion

This episode serves as a timely discussion for anyone navigating the current commercial real estate lending landscape. Jerry Dunn provides a seasoned perspective on how to operate, adapt, and anticipate market cycles. Topics such as lending in volatile markets, A10’s differentiated model, the shift in underwriting standards, and predictions for rescue capital and creative deals in 2023 make this essential listening for lenders, borrowers, and real estate professionals alike.

Listen to the full episode for more nuanced discussion and anecdotes of navigating real estate cycles from the lending side.