Selecting the right commercial real estate lender or refinancing an existing CRE loan isn’t as easy as it may seem. At first glance, there appear to be plenty of lenders and loan options to choose from: banks and insurance companies, credit unions and GSEs like Fannie Mae or Freddie Mac, the SBA, CMBS and REITs, private debt funds and hard money lenders.
While they all want to put their money to work, the way that their money works – and what they expect from the borrower in return – often works in dramatically different ways. The fact is, not all lenders are created equal. By accessing lending data from CrediFi, investors can analyze those differences and their affect on the mortgage capital market and construction lending.
In this article, we’ll take a quick look at why lender type matters.
Common commercial real estate loans
In today’s mortgage capital market, there’s a loan for almost every situation. Commercial real estate loan terms can be designed around the specific needs of the borrower and lender. In most cases, the property itself serves as the loan collateral.
Some of the most common commercial real estate loans include:
SBA 7(a): One of the two most popular loans backed by the Small Business Administration. With a maximum loan amount of $5 million, SBA 7(a) commercial real estate loans are targeted toward borrowers who want to purchase or need to refinance owner-occupied property.
CDC / SBA 504: Best suited for owner-occupied borrowers who need a higher loan amount than the $5 million maximum provided by SBA 7(a)s. In both cases, the SBA doesn’t make loans directly, opting instead to provide funds to SBA-approved lenders such as traditional banks.
Construction Loans: Usually offered by local or regional banks or credit unions who are familiar with the unique characteristics of the local real estate market. Construction loans are used to fund the costs of a development project before longer-term funding is obtained. Loan terms are usually less than 1 year, with higher interest rates and fees due to the inherent risk in developing commercial real estate.
Bridge Loan: Short-term loans used by investors to “bridge the gap” between a construction loan and receipt of a longer-term “take-out” commercial loan. Loan terms range from 6 to 36 months.
Traditional Commercial Loans: These CRE loans are offered by traditional institutional banks and lenders. Maximum loan amounts vary based on the lender, with terms generally ranging between 5 and 20 years. Many traditional banks are also SBA-approved lenders, and offer loan programs from Government Sponsored Enterprises such as Fannie Mae and Freddie Mac.
Hard Money Loan: Designed for short-term borrowing with higher fees and interest rates, and lower LTVs than other types of popular commercial real estate loans. Funding usually occurs within a few weeks with loan terms of up to 36 months.
Private Money: Offering a variation on hard money lending, private money lenders are more interested in deal flow and longer-term returns. Loan terms are usually longer, with rates and fees structured to meet the unique needs of the borrower and the private money lender.
Where to get a commercial real estate loan
Where to go for a commercial real estate loan depends on different factors such as the property and project type, investment strategy of the borrower, mortgage market demand and the level of competition from other lenders. In addition to traditional banks, credit unions, hard and private money lenders, other sources for commercial real estate capital include:
- Insurance companies: A recent report by the Mortgage Bankers Association notes that life insurance companies hold almost 15% of all outstanding commercial and multifamily debt. Loan sizes typically range between $1 million and $100 million, depending on the size of the insurance company, property type and geographical preferences, and the company’s existing mortgage portfolio.
- CMBS: Commercial mortgage backed securities offer more flexible underwriting guidelines compared to traditional commercial loans. Also known as “conduit loans”, they are good for borrowers seeking a higher level of leverage, lower fixed rates, and longer amortization periods with a balloon payment. Unlike insurance companies who hold the loans on their books, CMBS loans are originated by investment and commercial banks and then pooled together and re-sold to debt investors as fixed-income generating securities.
- REITs: Real estate investment trusts generally specialize in specific real estate asset classes. They also provide funding for sector-specific property such as data centers, cell phone towers and energy pipelines, and self-storage facilities. REITs make direct loans to real estate owners and operators and also invest in mortgage-backed securities.
Choosing the right commercial real estate loan
There are a wide variety of loan options in the mortgage capital market, but not all lenders are created equal. Commercial financing can be complex, logistically challenging, and create undue risk if the wrong lender or loan product is used.
Commercial real estate loan data from CrediFi provides owners and investors with a powerful tool to analyze the moving parts of the commercial capital market to select the right lender for each unique deal. One way to start is by using CrediFi’s property report to see how your property, your competition, or your next target acquisition appears to lenders. Click here to request a complimentary property financing report.
In our next article in this four-part series we’ll take a look at the most active lenders in the market today.
