Due to the shrinkage in capital in traditional banking markets, most Banks have lacked the capital to fund large loan growth. Although many Banks have gotten their balance sheets to the point where they are healthy again and are actively funding new transactions, many banks have limited overall capacity and are focusing their loan growth on core low risk lending markets such as apartment buildings, owner-occupied commercial properties, and C&I lending relationships (commercial & industrial lending such as receivable, equipment, and inventory finance). Although some banks will finance investment real estate loans, many Banks are not providing financing for such transactions and the financing that is available is limited to borrowers and properties with the best credit, lowest loan to values, and best tenants.
In order to fill the void left by traditional commercial bank lending, there has been a rush of private capital into the marketplace willing to make higher risk loans. This capital is not always in the form of hard expensive money, but often times is mutual fund, retirement fund, and investor capital looking for a safe alternative fixed rate of return. These lenders have raised capital in funds, or are individual investors willing to get aggressive in offering private capital to fund some of the loan opportunities traditional lenders are just not interested in doing in this market. Below is a sample list of many of the loans traditional banks are not interested in making where private capital has come in and filled the void.
1) Discounted note payoffs. Sometimes commercial loan borrowers negotiate discounted loan payoffs from their commercial lenders due to either a sale of their loan to a new lender or just because the bank wants the loan off its books but the collateral value is no longer there. Traditional banks do not like to finance other banks taking a discount. Private lenders do not have the same concerns, and so long as the loan to values are acceptable, private lenders will provide short-term bridge financing to allow Borrowers time to complete the discounted note payoff and get cash-flow settled into place before refinancing with a traditional lender.
2) Troubled credit. If a Borrower has troubled credit, had to file bankruptcy in order to stay a Bank from aggressive collection action, or has missed some loan payments due to stress with other holdings, most commercial banks want nothing to do with those transactions. Many private lenders can look beyond these issues and look at the true value of the asset and cash-flow they will be loaning against, and make these loans despite some of the story to them.
3) Global cash-flow issues. In this market many commercial loan borrowers that have investment real estate have assets that are doing well and assets that are doing poorly and are a drain on cash-flow. If a commercial loan borrower does not have good global cash-flow, a traditional lender is likely to take a pass on a strongly performing asset that itself has strong cash-flow due to concern about the borrower’s overall capacity to service all of their obligations. Many private lenders will look beyond global cash-flow and will lend money against solid performing assets despite other troubled assets that borrower may own.
4) Construction Loans. Traditional banks are very hesitant to fund construction loans in this market, whether it is ground up construction or just rehab construction, due to the increased level of risk associated those projects and the increased capital requirements Banks have put into place for those projects. Private lenders do not have additional capital requirements, so as long as they can mitigate much of the risk, many private lenders are willing to fund construction loans.
5) Transitional properties. Often time borrowers have properties that are in transition and may have a high vacancy rate or are in need of some work. Traditional banks often do not want to take on the risk of a property that is not producing strong cash-flow today and is not fully improved. Private lenders are willing to take on that improvement risk and are willing to fund many of these projects.
6) Special-Use properties. Many Banks have restrictions of the amount and types of financing they will provide to special-use properties such as car washes, restaurants, gas stations, hotels/motels, etc. Although some private lenders do have similar restrictions, there are many private lenders that actively welcome the opportunity to finance these assets so long as the cash-flow and loan to values are reasonable.
7) Lack of Historical Cash-Flow. In this market many borrowers are purchasing transitional properties or paying cash for properties and then improving cash-flow. Most traditional banks want at least one year of seasoning if not two or more years to evidence on-going cash-flow support for transactions. Some private lenders will provide financing on properties with very limited cash-flow seasoning.
8) Cash-Out. Most traditional bank lenders are hesitant to give commercial loan borrowers cash-out on commercial properties, specifically investment real estate. They do not want the Borrowers getting over-leveraged like what happened to partially get us into the current economic crisis, and cash-out is often frowned upon by regulators. However, many private lenders are willing to provide cash-out so long as the collateral value and cash-flow are strong enough and justify the cash-out the commercial loan borrower is requesting.
As can be seen, there are many reasons for which the use of private lenders makes sense in this market. With so many private lenders offering conforming fixed rates, many times the products these lenders are offering are just as competitive as many banks programs, but are available to a larger percentage of commercial loan borrowers. Although not all borrowers will qualify for the most aggressive of private lending funds, even hard money costs have come down quite dramatically with so many new private lenders in the market today with capital raised they need to deploy. If you have not found a traditional financing option for your project or property, you should consider exploring private lending options. Here at CLX we work with close to 50 private lenders offering both conforming / bank competitive fixed rates as well as higher risk hard money rates, and can often times find borrowers the right solution when the traditional bank markets are not offering any solutions.