The current credit crisis has made it much harder for investors to qualify for an institution-sponsored commercial mortgage (bank, broker, insurance company). Underwriting standards have become much stricter and lending parameters have tightened. Very few transactions are accepted by banks and even fewer are closing.
Many good loans that should receive funding are rejected from the outset. We call this situation the "funding gap".
Recently, many hedge funds and private equity firms have recognized that there are opportunities for companies that could help close the financing gap by offering private commercial mortgage loans to quality borrowers who have been excluded by their investment. banks. In the last 18 months, fund managers have committed hundreds of millions of dollars in the real estate finance industry. They buy distressed mortgage paper directly from distressed lenders and are quite willing to take out new commercial property loans and development projects.
But before commercial real estate investors take out a loan from a hedge fund or another private lender, they must know some important things.
Private commercial mortgage lenders are opportunistic investors; a hedge fund is in business to generate high returns for its investors in an efficient and timely manner. The loans they offer will be short-lived (rarely more than 36 months) and will carry much higher interest rates and origins than a bank or broker on Wall Street. In addition, hedge funds will be very aggressive in foreclosure situations; they will take your property if you do not do it.
The funds and private lenders with which we work currently charge an annual interest of 10% to 15% with 3-4 points. This means that borrowers can expect to pay a APR of 13% to 19%. In addition, borrowers are responsible for the cost of third party reports that may be required, such as assessments, environmental assessments and feasibility reports.
On the positive side, there is capital available for these commercial private mortgage loans and transactions can be concluded very quickly. Most funds prefer income-producing commercial properties owned by investors, such as apartment buildings, office buildings or warehouses. They usually lend up to 65% of the value of a property and the subscription is based on equity and not on credit. They will lend for both purchase and refinance, but private loans are "bridging" loans and a viable and realistic exit strategy needs to be put in place. In other words, they will need to know exactly how they will be reimbursed.
This credit crunch has been devastating for the commercial real estate sector and the problems will not go away. While we all expect the situation to improve, private lenders, including hedge funds and private equity firms on Wall Street, have cash and are ready to lend them.