CLIENT EDUCATION Commercial Lender Types
Commercial real estate properties are financed by a variety of mortgage lenders. Each lender type has their own general box for the types of deals where they are usually a proper fit, and within each lender type – each individual lender has their own unique program parameters, requirements, and appetite. As the market changes, so do the lending programs for each individual lender and is something that is constantly in flux. HarborWest maintains close relationships with the most competitive individual lenders and consistently tracks changes to their programs as well as new lenders entering the market. Navigating this terrain can be difficult for a variety of reasons – but there are some general rules of thumb a borrower should be informed of when discussing their best route with HarborWest.
The most well-known commercial lenders fall under this category and include banks, credit unions, and savings & loan institutions. These institutions source capital from their customer deposit base to make available for commercial lending purposes. Most banks have a specialty commercial real estate loan department to handle these requests that are separate from the consumer lending departments available to the general public for such things as credit cards, personal loans, or home mortgages. HarborWest will provide preferred access to these specialty departments, and in the case of a pre-existing relationship, help you leverage your relationship for better rates and terms. Banks usually pursue aggregate client relationships and can usually offer rate discounts and underwriting exceptions on a commercial mortgage request in exchange for deposits or additional business. The size of the bank can also be beneficial to a borrower. Larger banks that have national reach can service a client with properties in different states, while community banks that are limited in their lending footprint can make loan offers for deals that might not gather interest elsewhere.
Banks are also a primary source for construction lending being mostly footprint lenders as they allocate funds for communities they serve and are also best setup for the construction draw and reimbursement process to developers since they have local contacts to monitor the project. Banking institutions typically have the lowest processing fees and a variety of flexible programs to meet client needs. Each bank typically has their own “box” to fit their lending strategy and goals. They also however are recourse lenders for the most part and can be conservative, more paperwork heavy, and scrutinize a borrower's personal cash flow and credit more than other lender types. Banks are also more regulated, so it’s important to work with HarborWest to identify and tackle any potential audit or regulation issues with your request before moving forward.
Life Insurance Companies
Many life insurance companies have dedicated departments to invest their customer premiums and one of the largest asset classes for that is commercial real estate debt. While many life companies have an equity investment division whereas the life company is a commercial real estate investor, the larger focus is on the debt side where they can better control their risk. Life companies rely on the origination and servicing of commercial mortgage companies to execute this and are very rarely available to borrowers directly. You must be an approved correspondent lender or brokerage with a track record and meet professional requirements to originate new commercial real estate loans for life insurance companies. HarborWest is an approved correspondent lender for a variety of life insurance companies to provide direct access to these private programs to our clients.
Due to the nature of life insurance, their debt investments need to be more conservative than other lender types. Life insurance companies for the most part tend to target low leverage (low LTV) opportunities in the larger MSAs. They typically require experienced real estate investors and a good liquidity position on the borrower’s side to qualify for their top programs. Sponsor and property requirements tend to be fairly strict in order to be a low-risk and predictable investment return to the life insurance company, but qualified borrowers can benefit with very low, long-term fixed rates and commonly can be offered non-recourse loans.
Conduit Lenders (CMBS)
Conduit lenders finance loans under a Commercial Mortgage-Backed Security (CMBS) execution platform. Commercial mortgage-backed securities are bonds that are collateralized by a pool of commercial real estate properties. The bonds are divided up into “tranches” which offers bond investors different risk and return profiles to choose from. New securitizations are rated and then monitored by independent rating agencies and available to the public. CMBS loans are securitized, so originators pursue loan requests that will be locked in for the long-term. To attract borrowers to this, they can typically offer higher leverage, longer amortizations, full-term interest-only options and attractive rates.
CMBS loans are always non-recourse as well since the collateralization is primarily based on the property which can be a huge draw for many borrowers. However, CMBS loans can be somewhat complex at times. Loan structures can become incredibly involved with multiple conditions and restrictions not found with other loan types. Rates are not locked until right before closing, which can make a stark difference for larger loan amounts if the transaction occurs during a volatile market. Required legal fees for CMBS financing can be cumbersome and excessive compared to other loan types. CMBS loans also require defeasance as their prepayment penalty, which can be extremely costly if you want to sell or refinance the property (defeasance is explained in a different section of this e-Book).
Given these implications, CMBS loans are usually a better fit for long-term hold properties and larger loan amounts that justify the higher fees to execute. HarborWest can provide CMBS cost comparisons and defeasance scenarios to help clients better understand this option, as well as our experience and back office legal contacts to help negotiate loan documents for larger transactions.
Government Sponsored Entities (GSEs)
Government agencies or government-sponsored entities (GSEs) among others include SBA (Small Business Administration), HUD (Dept. of Housing & Urban Development), FNMA (Fannie Mae) and Freddie Mac (FHLMC). GSEs do not directly originate loans, but instead have approved correspondent lenders and brokerage companies like HarborWest originate new loans for them that meet specific criteria and assume the loan from the correspondent. The government agencies are primarily strong candidates only for multifamily financing (FNMA, FHLMC, HUD) and small-cap owner-user business real estate for companies (SBA).
Government agencies account for almost half of all multifamily loans and small business real estate loans financed in the US, as their programs can reach more rural areas where other lenders may not be willing to lend. Paperwork and processing times can be more demanding than with other lenders which needs to be considered for purchase transactions with strict escrow deadlines. The agencies providing multifamily loans are typically competitively priced and always non-recourse which can be very attractive to investors, and especially attractive to syndicated entities or foreign investors that likely would run into issues with recourse lenders like banks.
SBA real estate loans can offer up to 90% (LTV) financing to small businesses which many times is the only option for companies with minimal equity to expand their operations or purchase instead of leasing their space. While the SBA may be the funding source for these owner-user transactions, it is actually the bank or approved correspondent that determines the interest rate they can offer. HarborWest tracks the market lenders with the most competitive SBA program rates and can also help negotiate discounts by establishing business banking relationships with that specific lender.
A commercial real estate debt fund is a private equity backed fund that pools individual investor capital and deploys that capital into commercial real estate debt opportunities. These funds have always existed but became more prominent after the most recent major 2008 recession, as banking regulations and scrutiny became tighter. Debt funds usually specialize in a specific asset type, location or strategy and pool money from investors looking to allocate a portion of their savings into commercial real estate. Debt funds are less regulated so they all have better flexibility to work with buyers and landlords, which can be beneficial to negotiate more favorable rates and terms for your new mortgage. Many funds specialize to go head-to-head with the most aggressive banks and institutions with more flexibility, while others may specialize in bridge loan products for example offering tailored and flexible loan terms with competitive market pricing.
This category also includes the online marketplace or “crowdfunding” which started to gain traction after the recession but has lost its spark in recent years. Crowdfunding platforms allow easier entry into debt funds with a much lower investment requirement for the debt pool and diversification by splitting that investment into both debt for mortgages and equity for crowdfund principals to use in acquisition opportunities. Debt funds are a preferred capital source for HarborWest as they tend to be more “investor friendly” - more strategic, flexible and negotiable compared to other lender types. HarborWest maintains relationships with very select debt funds that specialize in certain situations or asset classes in order to bring the most fitting product to our clients.
Private lenders are a fantastic source of capital when other lender types cannot perform, or the loan request requires the execution to be extremely strategic. Private lenders are usually individuals or family office lenders that are lending their own funds. Seller financing would technically fall under this category. Private lenders are lightly regulated, so they are able to provide very flexible terms, loan structure and most importantly – make decisions based on pro-forma numbers and mitigating factors if the property or borrower does not currently qualify for stabilized property programs with other lender types. Expedited closings are usually also available as there is usually no “red tape” to go through for a decision if the private lender is ready to commit based on his or her own level of due diligence. Private loans usually cannot offer high leverage and require a fair amount of equity and are comparatively expensive on both rate and fees than other lender types.
Many private loans are short term which can be an issue if the loan is coming due and the property or borrower still does not qualify. If the borrower is not able to refinance or pay off the private lender at maturity, they could be at risk of default. However, if the potential opportunity of the property is too attractive to pass up, many times a private loan in the long-term can be well worth the short-term pain of high rates and fees. The private lending arena is in general very scattered and lacks a sense of professionalism in our opinion. HarborWest has refined our private money capital sources through the years to only include private lenders and investors that have built a proven track record with our team, repeatedly performed for our clients, and that we can personally recommend.