Private Commercial Mortgage Loans; Where to go When the Bank says No

The world is in a severe credit crisis and the economies of the world are responding by dramatically contracting. Commercial mortgage lending, though in better shape than residential lending, is not immune to the problems. Deal flow in commercial real estate is down by 75% by some estimates and it’s not because there are not good deals out-there (there are some great deals out-there) it’s because sponsors can’t get deals financed. The institutional lenders such as banks, insurance companies and the Wall Street brokerage firms, are in survival mode. They won’t part with a dollar by lending it out because they fear insolvency if asset values continue to drop. If they can’t sell a loan today, they won’t write it. Commercial real estate, more-so than other industries, depends on leverage; virtually all commercial property is mortgaged.

So where can a property owner, investor and developer turn when the bank turns them down? The answer for an increasing number of borrowers is to private commercial mortgage lenders. Once referred to as “hard money lenders”, private lenders have not enjoyed a good reputation. Today however, private lenders are well respected and highly sophisticated. Private commercial mortgage lenders are often structured as limited partnerships and formed by small groups of wealthy individuals or business entities with large amounts of cash to invest. Hedge funds and private equity firms also form private lending companies or have commercial mortgage lending divisions. Some are set up as corporations others are limited liability companies (LLC). What defines a private lender and differentiates it from institutional lenders, is that private lenders are privately held entities lending their own money for their own benefit. They do not fall under the jurisdiction of Federal or State banking regulators and often “portfolio”, or hold the loans they write rather than selling them into the secondary mortgage market.

Private lenders are unique in-that they enjoy a measure of flexibility that conventional lenders do not. They can set their own lending standards without regard to the credit markets or cumbersome government regulations. They can make decisions fast and fund deals in a matter of days, instead of the months and months that it takes to close bank loans. Lending decisions are typically made by a small group of partners or managers who understand the commercial real estate landscape and act decisively when they like what they see. Private lenders are cash rich, opportunistic investors that are fulfilling an important role during this credit squeeze. Private money is filling some of the void created by the institutional firm’s inability to lend.

None of this is to say that privately funded commercial mortgage loans are necessarily easy to get, just that private money is still flowing while bank money is frozen. Private loans are generally equity based loans rather than balance sheet or credit driven. Loan-to-value (LTV) ratios are significantly lower in the private sector, which means sponsors must come to the table with more cash than they might be used to. It is rare to see a private lender offer to loan any more than 65% of a commercial properties value. Private loans also tend to be short-term in nature; borrowers must have a viable exit strategy in-place. Most private commercial mortgage loans act only as bridge loans until permanent, conventional funding can be secured. They are typically structured as interest only loans that come due in less than 36 months. Rates and origination points are also significantly higher for private loans when compared to conventional financing.

Private commercial mortgage lending is the fastest growing segment of the commercial real estate industry and for many investors it has become the only game in town. Until the overall credit situation improves borrowers will continue to seek alternative funding sources. When the bank says no, and it’s likely they will, commercial property owners do have a place to turn.

MasterPlan Capital LLCCommercial Mortgage Loans – Privately Funded – Equity Financing – Asset Management – Simple, 1 Page Commercial Mortgage Application Online – Quick Answers – Close in 10 Days – The author, Vincent Remealto, is a commercial real estate valuation and underwriting analyst for MasterPlan Capital.


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