| It is more difficult to get a commercial mortgage loan | | | | more. Most private loans today are being quoted at |
| today than it was two years ago. The credit crisis has | | | | between 10%-16% |
| prompted many commercial real estate investors to | | | | Points |
| look into alternative sources of capital. | | | | It is rare to see a bank charge more than 2 origination |
| Private lenders, often called hard money lenders, have | | | | points on any loan. |
| gained popularity recently as banks and Wall Street | | | | Private lenders will typically charge at least 3 points |
| brokers have refused to make loans. It is true that | | | | and as many as 5. |
| privately funded commercial mortgage lenders can be | | | | Terms |
| more flexible and can close loans in just days, but that | | | | Traditional lenders usually offer 3, 5, 7 or 10 year fixed |
| does not mean they are easy to get. | | | | terms on loans amortized over 10-25 years. A balloon |
| Before a property owner applies to a hard money | | | | payment or a refinance is usually necessary at the |
| lender they should understand the differences | | | | end of the term, although more and more banks are |
| between institutional funding and private funding. | | | | offering adjustable rate products that don't require |
| Regulation | | | | refinance. |
| Traditional lenders like banks, insurance companies and | | | | Private loans are almost always short term, bridge |
| Wall Street investment houses are all highly regulated. | | | | type loans. Most charge interest only payments rather |
| Banks carry FDIC or other government insurance, | | | | than amortize. The average private loan term is about |
| insurance companies are watched over by each | | | | 18 months and hard money lenders rarely write a loan |
| State Insurance Commission and Wall Street is | | | | for more than 36 months. The loan must be paid off in |
| governed by the Securities & Exchange | | | | full at the end of the term. |
| Commission (SEC) and the Financial Industry | | | | Underwriting |
| Regulatory Authority (FIRA). There is a tremendous | | | | Regulated institutions are now universally full |
| amount of bureaucracy, red-tape and rules involved in | | | | documentation, full underwriting lenders. Every "I" must |
| originating conventional, institutional loans. All this | | | | be dotted and every "T" must be crossed. They will |
| regulation means that bank loans are slow, banks are | | | | fully underwrite the property first then the borrower. |
| not flexible and there are loads of paperwork and | | | | Both must pass muster or the loan will be denied. |
| documentation involved. | | | | Private lenders are equity lenders. They lend primarily |
| Private lenders are, by definition, private entities. They | | | | based on the amount of equity in the target property. |
| might be organized as LLCs or Limited Partnerships | | | | Investors will find hard money loans require much less |
| (LPs) or they might be a single, wealthy individual who | | | | paperwork and documentation. Private lenders will be |
| makes money by making loans, but they do not fall | | | | careful and won't lend to just anyone, but the |
| under the prevue of banking regulation. They must, of | | | | underwriting is much more straight forward. |
| course, adhere to all anti-fraud laws as-well-as all laws | | | | Loan-to-Value (LTV) |
| against un-fair and deceptive business practices, but | | | | Banks used to lend up to 80% of a buildings value and |
| they don't have to report their specific lending activity | | | | allow a 10% second position loan, allowing sponsors to |
| to Government Agencies and are not subject to | | | | borrow as-much-as 90% of a deals value. Those |
| Government licensing or chartering. Hard money | | | | days are gone. Now even the largest, strongest banks |
| lenders can be highly flexible in their underwriting | | | | won't lend more than 75% LTV and they discourage |
| criteria; they can change their own lending policies as | | | | second loans. 65% is typical unless a borrower has a |
| they wish for their own reasons. They don't have to | | | | very strong balance sheet and a large liquidity position. |
| require large amounts of documents if they don't want | | | | Private lender will not exceed 65% LTV even for |
| to and they can move very quickly if they like a deal. | | | | properties that have excellent cash flow. |
| Speed | | | | Underperforming or vacant buildings will receive offers |
| Bank and other institutional loans typically take 90-180 | | | | in the range of 50%-60% and land loans will come in at |
| days to close. | | | | well under 50% LTV. |
| Private loans can close in a matter of just days if they | | | | In a perfect credit environment bank loans or loans |
| have to (a virtual impossibility when dealing with a | | | | from other large money centers are the most |
| bank) but generally take about 21 days. | | | | desirable. They offer the best terms, lowest rate and |
| Rates | | | | fewest points. Any one who can qualify should seek |
| Conventional loans are usually based on an established | | | | funding from these powerful institutions. However, we |
| benchmark rate such-as the 10 year US Treasury | | | | are not in a perfect credit environment. We are in a |
| Bond. The bank takes the base rate adds an index | | | | mess. |
| and comes up with a loan rate. Treasury and other | | | | Banks have tightened their standards, property values |
| rate indexes are historically low right now (Fall '09) and | | | | are dropping and the secondary mortgage bond |
| commercial mortgage loans (for those who qualify) | | | | market has completely collapsed. These |
| rates are being priced at between 5.5%-7.5% | | | | circumstances have made it difficult or impossible for |
| Private lenders generally hold the loans they issue in | | | | people to secure a conventional loan. Private lenders |
| their own portfolios as-opposed to institutions who | | | | are more expensive and offer only short term |
| generally sell their loans to Government Enterprises or | | | | financing, but they are filling a vital need and should be |
| the secondary market. Hard Money lenders make their | | | | considered by borrowers if the bank has turned them |
| profit on rate and points so they charge significantly | | | | away. |