Not surprisingly, commercial real estate financing is considerably different from that of a traditional home loan. Outside of the amount being borrowed, which is typically higher than your average single-family mortgage, commercial real estate financing isn’t typically backed by a government entity, nor are institutions willing to take significant risks; the amount of money on the line is simply too great. It’s safe to say that most institutional lenders are more risk-averse; they will go the extra mile to make sure their investment in borrowers is a sound one. (Often reading more than a few commercial real estate investing books to get their knowledge up.) Sometimes that means charging a higher interest rate, and with others it means scrutinizing the borrower that much more. Having said that, which real estate financing option is right for you?
It’s not uncommon for commercial real estate financing to place more weight on the asset in question or even the business behind the borrower. All things considered, your expectations when investing in commercial real estate shouldn’t mirror those set forth by the traditional loan process, but rather elicit an entirely new set of expectations. While the two share similarities, the differences are striking, and worth noting.
If you are interested in acquiring commercial real estate financing, I want to encourage you to ask as many questions as possible before you take the leap. And to help get the ball rolling, here are some of the most common commercial real estate financing options made available to investors. Take the time to familiarize yourself with them before making any final decisions.
Where To Find Commercial Real Estate Financing
1.Private Money Lenders
Unlike the other commercial real estate financing options I will discuss, private money lenders don’t typically represent a traditional lending institution. As their name suggests, private money lenders work as a private party. Perhaps even more importantly, however, these lenders practice asset-based lending models; they focus more on the property in question than the borrower. All things considered, private money lenders have the fewest hoops to jump through. If you bring them a promising property with a lot of potential, chances are they will approve the loan. However, their lending guidelines aren’t without their own caveat. While private money lenders have become synonymous with a faster and easier loan approval process, they are more expensive.
Generally speaking, private money lenders come at a cost, but that’s not to say the price of admission isn’t worth it. More often than not, the speed of implementation awarded to investors that receive a private money loan allows them to act fast, and in many cases move on a property before the competition. You could argue that using any other form of commercial real estate financing will put you behind the eight ball, as anyone using a private money loan will likely find themselves days — if not weeks — ahead of anyone waiting for loan approval from a traditional lender. Remember, in real estate speed is everything, even in commercial real estate.
Advantages
- Generous standards
- Speed of implementation
Disadvantages
- Higher rates
2. Banks
Local banks, regional banks and credit unions have all become synonymous with smaller deals and rightfully so; they are smaller than their national counterparts. As a result, these types of lenders typically offer shorter-term financing with one of two options: balloon payments or rate resets. And while their size typically allows these lenders to exercise more flexibility and creative prowess, they are limited by their size and forced to lend in a more conservative nature.
National banks, on the other hand, can offer a wider range of commercial real estate financing options for those that seek them. It’s entirely possible to finance a commercial property with a long-term fixed-rate mortgage options with seven to 10 year balloons, provided you can find a national bank willing to do so. It’s also worth noting that some national banks will conform to the smaller bank business model. Just know this: national banks will vary dramatically in the services they provide; make sure you do your research.
Advantages
- Banks offer fixed and floating options
- Banks offer flexibility larger lenders can’t
Disadvantages
- Recourse
- Shorter fixed periods
- Higher rates
3. Federal Agencies
For multifamily properties, the same government agencies (and sponsored entities) that offer residential loans also provide commercial options that are worth looking into. As it turns out, there are two federal agencies you are more than likely already aware of: Fannie Mae and Freddie Mac. These government-sponsored enterprises have become known for their competitive underwriting options for commercial and multifamily properties. It’s worth noting, however, that government-sponsored loans have become ubiquitous with stricter approval criteria and are therefore not as easy to get. Those that do receive approval will surely be rewarded accordingly, as they have been known to offer long amortization periods and very enticing terms.
Advantages
- Competitive rates
Disadvantages
- Strict application process
4. Life Insurance Companies
Whether you want to believe it or not, life insurance companies are actually a viable source of commercial real estate financing. In fact, it’s entirely possible to finance some of the largest and most sought after properties with capital received from a life insurance company. That said, these sources of income are typically more conservative, as most LTV ratios sit between 60 and 70. However, their conservatism is complimented by long-term fixed-rates, with 10-year balloons nonetheless. Most people will be happy to hear that life insurance companies can lend on a non-recourse basis, which awards the borrower more protection in the event of a default. Unless fraud is evident or egregious breaches of the contract take place, the lender can’t come after the borrower; they can repossess the property, but the borrower is protected.
Advantages
- Lower interest rates
- Flexible structuring
- Non-recourse
Disadvantages
- Conservative LTVs
- Short repayment schedules
Commercial real estate financing is a complex topic, but there is one thing everyone can do to make their lives easier: research. No commercial real estate project should be taken on without minding due diligence, and the first place to start is right here. Do yourself a favor and familiarize yourself with the myriad of commercial real estate financing options made available to investors and uncover which is best for your particular situation.
