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What Do Commercial Mortgage Lenders Do?

Finding a good deal in commercial real estate is quite easy these days. However getting the deal financed is another story. And securing a commercial mortgage is even more difficult for newer or younger investors.

The role of commercial mortgage lenders

Traditional lending institutions such as banks, Wall Street brokers and Hartford insurance companies have largely taken themselves out of the lending picture. Banks just are not lending they way they should be. And any loans they are making are being underwritten much more conservatively. Loan-to-value ratios are much higher and lending parameters are much tighter.

This leaves commercial real estate investors lacking a perfect credit report or loads of cash without reliable sources of capital. Thousands of good borrowers with excellent loan proposals have been rejected by their regular lenders and are desperately seeking funding.

For a growing number of these frustrated borrowers the answer is private commercial mortgage lenders, often called “hard money” lenders. Commercial mortgage loans carry higher interest rates and more origination points, but hard money lenders can be much more flexible in their lending decisions and can close and fund multimillion dollar deals in just a few weeks. Commercial mortgage lenders are specialty or alternative lenders that have been stepping in and filling the void created by the credit crisis.

Private Commercial mortgage lenders defined

Commercial mortgage lenders can be set up as hedge funds, private equity firms or closely held corporations, many are limited liability companies or limited partnerships. Whatever form of business entity they operate as, they share a common characteristic; they are privately owned and thus do not fall under the jurisdiction of the various State or Federal banking regulators. Private lenders are free to be flexible with their lending standards and are able to make quick decisions. Further, many of them are “portfolio” lenders. They hold the loans they make in their own loan portfolios for their own accounts. This unique feature of hard money lenders means that they are not dependant on the secondary mortgage bond market for liquidity. Private lenders remain largely unaffected by the credit squeeze.

The private lending sector is thriving today, while institutional lenders are just hoping to survive. The sheer volume of applications for commercial mortgage loans flooding into the offices of private commercial mortgage lenders allows them to be extremely selective and the desperation of borrowers, who face the prospect of losing their properties or projects, makes it a lenders market. Hard money lenders typically charge interest rates in the mid to high teens with three or more origination points, yet they are finding investors very receptive. It seems that commercial property owners and developers are happy just to get a loan and are not about to haggle over price. And as the credit market continues to stagnate the growth in private lending is projected to continue to grow.

Until recently private lenders had a poor reputation as shady operators. They were called “hard money” lenders because the loans they made were against real estate, a “hard asset”. Today private lending is a thriving and is considered highly respectable. Without oversight or interference form government regulators, private lenders are fulfilling an important role. Without the lending being done by private sources the liquidity crisis and our economic problems would almost certainly be much worse.

Until things significantly improve in the institutional credit markets, good borrowers with good loans will continue to turn to private funding sources, and the private commercial mortgage lending industry will continue to prosper.

What do Private Commercial Mortgage Lenders seek?

Private lenders are equity based lenders; loan decisions are not driven by the credit of the borrower. It is essential that the collateral property have substantial equity in it. Most hard money commercial lenders won’t lend more than 70% of the purchase price or in the case of a refinance, the value of the commercial property. So if you are considering commercial mortgage loans be prepared for large down-payment requests or a good sized second mortgage. Also, borrowers will need to have some cash, typically 10% or more, in any given deal. Unfortunately the days of 100% financing are gone. Documentation requirements will be much less than conventional lenders would require but be prepared to back up any claims you make with some proof. Income producing buildings are favored by commercial mortgage lenders but most are willing to consider all property types.

Commercial Mortgage Lenders are now indispensable financers

With conventional lending institutions taking a hard stance, commercial mortgage lenders have become indispensable to the commercial sector. They are ready and willing to lend against quality buildings or well planned development projects. Investors should not give up on finding financing for their best deals until they have looked into a privately funded mortgage.