The ongoing credit crisis has made it much more difficult for investors to qualify for an institutionally financed commercial mortgage loan (bank, broker, insurance company). Underwriting standards have become significantly stricter and loan parameters have tightened. Banks are accepting very few transactions, and even fewer are closing.

 

Many good loans that should receive financing are being rejected immediately. We call this situation a “financing gap.”

 

Recently, many hedge funds and private equity companies have recognized that there is an opportunity for companies that can help fill the financing gap by offering private commercial mortgages to quality borrowers who have been foreclosed by their banks. Over the past 18 months, fund managers have committed hundreds of millions of dollars to the commercial real estate finance industry. They are buying distressed mortgage papers directly from troubled lenders and are very willing to issue new loans against commercial buildings and development projects.

 

But before commercial real estate investors seek a loan from a hedge fund or other private lender, there are a few important things to know.

 

Private commercial mortgage lenders are opportunistic investors; A hedge fund is in business to earn high returns for its investors in a timely and efficient manner. The loans they offer will be short-term (rarely more than 36 months) and will have significantly higher interest rates and points of origin than a Wall Street bank or broker. Also, hedge funds will be very aggressive in foreclosure situations; they will take your property if you do not comply.

 

The funds and private lenders we currently work with charge 10-15% annual interest with 3-4 points. This means that borrowers can expect to pay an APR of 13% to 19%. In addition to that, borrowers are responsible for the cost of third-party reports that may be required, such as appraisals, environmental assessments, and feasibility reports.

 

On the positive side, there is capital available for these private commercial mortgage loans and deals can be closed very quickly. Most funds prefer investor-owned commercial buildings that generate income, such as apartment complexes, office buildings, or storage facilities. They typically lend up to 65% of a property’s value and the underwriting is based on shares, not credits. They will lend both to buy and to refinance, but private loans are “bridge” loans and you need to establish a viable and realistic exit strategy. In other words, they will need to know exactly how the money will be returned to them.

 

This credit crunch has been devastating to the commercial real estate industry and the problems are not going away. While we all wait for the situation to improve, private lenders, including Wall Street hedge funds and private equity firms, have cash and are willing to lend it.