Consider Commercial Private Lending Companies

A robust residential hard money lending industry has been around a long time and may be at an all-time high due to the popularity of residential fix and flip investing in the United States. Recently, commercial hard money lending has gained traction and may be a valuable tool to seasoned real estate investors, both passive and active. Historically, small balance real estate acquisition and construction loans have been the bread and butter of commercial lending at smaller community banks. Due to strict regulatory changes, many community banks are restricted in the types of lending activities they are able to participate in and are painfully slow when they are able to lend. Non-bank lenders are filling this void by offering expedited closing options in exchange for higher interest rates and fees. Additionally, non-bank lenders will fund projects that are often off limits at many traditional banks including land loans, entitlement and development loans, and heavy property re-positioning loans.  Since the beginning of 2018, I have been fortunate to have visited and evaluated multiple hard money lending companies that fund commercial opportunities through work I have performed with Crestline Advisory Group.

Typical Terms:

Length - 12 months, but some lenders offer 36 month loans.

Size - $500,000 to $20 million

Origination fees - Often range between one and three percent.

Extension fees - Often one percent.

Recourse - Usually guarantees are required, but can be negotiable with some lenders.

Here are some scenarios where commercial hard money lending can be beneficial:

Investors with stabilized cash flowing properties

Non-bank lenders are extremely friendly toward cash flowing properties that are in need of bridge financing, particularly multifamily real estate. Because of the fierce competition associated with acquiring stabilized multifamily properties, investors with financing from a reliable hard money lender can have an advantage if they can offer to close on a property quickly. Some hard money lenders are able to close within a week in favorable situations. Interest rates are often in the reasonable range of 8 to 10 percent, due to the lower risk profile of stabilized income-producing real estate. The higher the quality of the underlying asset, the lower the rate will be. It may even be possible to obtain a non-recourse loan depending on the related property.

Investors looking to re-position properties

Properties that may not be considered stabilized are often difficult for traditional banks and require additional due diligence considerations that can extend the lending time frame. Even real estate investors with extraordinary net worth may get pushback from their traditional lender when seeking financing for a project that involves heavy rehabilitation or re-positioning. Rather than waiting, it can make sense for an investor to pay the premium in finance costs so that a property can be acquired and the construction work can begin. This could include a project as small as refreshing a small multifamily to the re-positioning of a vacant big-box store into a multi-tenant mixed-use property.

Investors seeking to obtain funding for development opportunities

After the trauma experienced during the 2008 to 2010 banking crisis, many traditional lenders will not even consider speculative development opportunities even when the underlying economics are sound and the project includes strong guarantors. Seeking funding from a private lender related to a development opportunity may be the most attractive option depending on the scenario. This might include purchasing development land or obtaining bridge financing while the property is going through an entitlement process. Additionally, some hard money lenders are willing to fund complex construction projects to highly experienced developers if underlying guarantor strength is also available.

Investors with life events

Although not as prevalent, some non-bank lenders are willing to work with borrowers that are navigating a life event such as a divorce or a real estate partnership split. Additional underwriting may be required, but these loans often still close within a couple of weeks. Interest rates may be in the nine to 15 percent range depending on the situation.

Investors seeking a passive real estate related investments

Many hard money lenders are organized as funds. Accredited investors can invest in a fund with attractive features such as monthly interest distributions. Annual yields to investors can be as low as seven percent for less risky options to over 10 percent for funds that invest in more speculative real estate loans. Since the loans have a relatively short duration, interest rate risk is mitigated. Downside risk becomes limited as the fund would end up owning the real estate at significant discounts if a significant downturn did occur.