| The world is in a severe credit crisis and the | | | | They can set their own lending standards without |
| economies of the world are responding by dramatically | | | | regard to the credit markets or cumbersome |
| contracting. Commercial mortgage lending, though in | | | | government regulations. They can make decisions fast |
| better shape than residential lending, is not immune to | | | | and fund deals in a matter of days, instead of the |
| the problems. Deal flow in commercial real estate is | | | | months and months that it takes to close bank loans. |
| down by 75% by some estimates and it's not because | | | | Lending decisions are typically made by a small group |
| there are not good deals out-there (there are some | | | | of partners or managers who understand the |
| great deals out-there) it's because sponsors can't get | | | | commercial real estate landscape and act decisively |
| deals financed. The institutional lenders such as banks, | | | | when they like what they see. Private lenders are |
| insurance companies and the Wall Street brokerage | | | | cash rich, opportunistic investors that are fulfilling an |
| firms, are in survival mode. They won't part with a | | | | important role during this credit squeeze. Private |
| dollar by lending it out because they fear insolvency if | | | | money is filling some of the void created by the |
| asset values continue to drop. If they can't sell a loan | | | | institutional firm's inability to lend. |
| today, they won't write it. Commercial real estate, | | | | None of this is to say that privately funded commercial |
| more-so than other industries, depends on leverage; | | | | mortgage loans are necessarily easy to get, just that |
| virtually all commercial property is mortgaged. | | | | private money is still flowing while bank money is |
| So where can a property owner, investor and | | | | frozen. Private loans are generally equity based loans |
| developer turn when the bank turns them down? The | | | | rather than balance sheet or credit driven. |
| answer for an increasing number of borrowers is to | | | | Loan-to-value (LTV) ratios are significantly lower in the |
| private commercial mortgage lenders. Once referred | | | | private sector, which means sponsors must come to |
| to as "hard money lenders", private lenders have not | | | | the table with more cash than they might be used to. It |
| enjoyed a good reputation. Today however, private | | | | is rare to see a private lender offer to loan any more |
| lenders are well respected and highly sophisticated. | | | | than 65% of a commercial properties value. Private |
| Private commercial mortgage lenders are often | | | | loans also tend to be short-term in nature; borrowers |
| structured as limited partnerships and formed by small | | | | must have a viable exit strategy in-place. Most private |
| groups of wealthy individuals or business entities with | | | | commercial mortgage loans act only as bridge loans |
| large amounts of cash to invest. Hedge funds and | | | | until permanent, conventional funding can be secured. |
| private equity firms also form private lending | | | | They are typically structured as interest only loans that |
| companies or have commercial mortgage lending | | | | come due in less than 36 months. Rates and origination |
| divisions. Some are set up as corporations others are | | | | points are also significantly higher for private loans |
| limited liability companies (LLC). What defines a private | | | | when compared to conventional financing. |
| lender and differentiates it from institutional lenders, is | | | | Private commercial mortgage lending is the fastest |
| that private lenders are privately held entities lending | | | | growing segment of the commercial real estate |
| their own money for their own benefit. They do not fall | | | | industry and for many investors it has become the |
| under the jurisdiction of Federal or State banking | | | | only game in town. Until the overall credit situation |
| regulators and often "portfolio", or hold the loans they | | | | improves borrowers will continue to seek alternative |
| write rather than selling them into the secondary | | | | funding sources. When the bank says no, and it's likely |
| mortgage market. | | | | they will, commercial property owners do have a place |
| Private lenders are unique in-that they enjoy a | | | | to turn. |
| measure of flexibility that conventional lenders do not. | | | | |