Commercial Loans and Fun Blog

Hard Money Commercial Loans and Family Offices

Posted by George Blackburne on Fri, Jan 14, 2011

What on Earth is a Family Office?

It sounds like a simple concept, but a lot of commercial mortgage brokers and investors forget it. In order to be a direct commercial lender, you actually need money to lend.

So the next time some clown, who is asking you for a $20,000 application fee, tells you that he is a direct commercial lender, ask yourself this question, "Where is he getting the dough to lend?"

Money to make commercial loans only comes from a small handful of sources. Life companies get their commercial lending dough from the premiums that policy holders pay for their life insurance policies. Banks, savings banks, S&L's, and credit unions get their commercial lending dough from the deposits that they receive from depositors.

Conduits, also known as CMBS lenders, get their commercial lending dough on an interim basis from bank lines of credit. Their commercial loans are eventually sold to a trust, that securitizes the loans into commercial mortgage-backed securities. This source of funds was almost completely dried up for two years following the crash in 2007, but the CMBS market is now showing some signs of life - but only for deals of $5MM or larger.

I think there are only two surviving commercial mortgage REIT's - Avatar and BRT Realty Capital - and they are making loans at hard money rates. (Do you know of any other commercial mortgage REIT's? I'd love to hear about tem. REIT's get their commercial lending dough from the sale of shares in the real estate investment trust.

The remaining source of commercial lending dough comes from private investors and mortgage funds. In 2006, before the Great Recession, there were about 250 large mortgage funds making commercial loans nationwide. Virtually every one of these funds got crushed during the Great Recession. Commercial real estate fell by 40%, and then commercial lenders flooded the for-sale market with commercial foreclosures. Since "everybody" knows that you can buy commercial foreclosures for 60 cents on the dollar, everybody wants a deal. Nowadays few commercial property buyers will pay more than 60% of 60% of 2006 valuations. Therefore almost every commercial mortgage fund in the country is now in the process of being wound down.

This means that today, in early 2011, the only way to fund a hard money commercial loan was for the hard money broker to syndicate a fresh group of private investors. Raising private money is much more difficult in 2011, compared to 2006, because so many private investors got chewed up in commercial real estate and in stocks because of the Great Recession. Large hard money commercial loans - deals larger than $2 million - have become almost impossible to obtain because there are so few mortgage funds remaining, and large syndicates of private investors are extremely hard to assemble.

I did see recently, however, a brand new commercial mortgage fund that raised $100 million in their initial offering. They were able to raise this kind of money because they raised their dough from endowment funds and family offices.

So what is a family office?

A family office is a private company that manages investments and trusts for a single wealthy family. The company's financial capital is the family's own wealth, often accumulated over many family generations.

Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million to operate, so the family's net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members.

More recently the term "family office" or multi family office is used to refer primarily to financial services for relatively wealthy families.

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Topics: family office, hard money commercial loan, hard money loan