Commercial Loans Blog

Future of Commercial Lending

Posted by George Blackburne on Mon, Sep 27, 2010

A Few Commercial Lenders Must First Make Some Outrageous Profits

A banker, preparing to give a speech on the future of commercial real estate lending, called me last Thursday and asked for my opinion. Below is what I told him.

The banks are only making a handful of commercial real estate loans. The commercial loans that banks will fund today are those with either 40% down payments or those commercial loans where the borrower maintains huge deposits with the bank. The normal commercial loan to a mere mortal - a regular investor with just 25% to put down - no longer exists.

So where does that leave us?

If we want commercial lending to recover to a healthy and vibrant level, a handful of commercial lenders need to start to making an outrageous profit. Once this happens, it is a fundamental maxim of capitalism that, "Outrageous profits breeds competition." Seeing the competition enjoy outrageous profits will tempt the banks back into the market.

So are any commercial lenders making an outrageous profit? This year we have seen the birth of several opportunity funds, whose target yields are in the range of 16% to 18%. If these funds achieve their targets, these are the types of yields that will cause some bankers to yearn to return to the market.

What is an opportunity fund? An opportunity fund is pooled investment vehicle, like a mutual fund. A hard money broker might put together a mortgage investment fund that consists of the pooled investment funds of several hundred private investors. Although such a mortgage investment fund is very similar to an opportunity fund, there is a difference.

The investors in an opportunity fund are typically not private investors, but rather they are institutional investors, such as pension funds, college endowment funds, hedge funds and wealthy family trusts. Opportunity funds therefore tend to be larger than hard money mortgage investment funds, so the deals that these lenders do are also larger.

Right now these opportunity funds are financing the purchase and renovation of REO's (bank foreclosures) and the purchases of discounted notes. They are also helping large developers buy out their current lenders at a substantial discount (discounted pay-off's).

You can apply to scores of hard money mortgage funds and opportunity funds by using

Topics: commercial loan, commercial lending, commercial mortgage