Twenty years ago, if you wanted a commercial loan, you might have applied to a savings and loan association, a thrift and loan association, or even a credit company. None of these company types are making many commercial loans today; so I am not even going to bother to describe them. They have gone the way of the buffalo.
All new commercial lenders have entered the commercial loan market. I will describe each type of commercial lender active in the market today, starting with the ones with the lowest interest rates.
The term, life company, is short for life insurance company. For the last 50 years, life companies have always offered the absolute lowest commercial loan interest rates.
Life companies offer fixed interest rates for up to ten years at rates as low as 175 to 200 basis points (1.75% to 2%) over ten-year Treasuries. That's the good news about life companies. The bad news is that life companies do not lend to mortals like you and me.
In order the qualify for a commercial loan from a life company, the loan must usually be larger than $5 million, the property must usually be less than ten years old, it must usually be located in a primary location in a football team city, and the property must usually be office, retail, or industrial. The property also has to be gorgeous, and the maximum loan-to-value ratio that you are likely to achieve is 55% to 58% LTV.
Like I said, life companies do not lend to folks like you and me. They lend to investors so stinking wealthy that they don't want a lot of leverage. They want the cash flow.
A conduit is short for Real Estate Mortgage Investment Conduit ("REMIC"). A conduit is a specialized commercial mortgage company that originates large commercial real estate loans for their eventual placement in the Commercial Mortgage-Backed Securities ("CMBS") market.
These conduit loans are aggregated in a giant pool of $2 billion or so, and then bonds, backed by the commercial mortgages in the pool, are issued and sold off by Wall Street-like investment bankers to life companies, pension plans, family trusts, bond funds, and other institutional investors.
The good news about conduit lenders is that their interest rates are only about 75 basis points (0.75%) higher than those offered by life companies. Conduits will also lend in secondary locations in fairly large cities not quite large enough to have a football team. In addition, the property does NOT need to look like a color, glossy postcard.
The bad news about conduits is that their minimum loan size is large - typically $4 million+. In addition, their loan-to-value ratios are pretty low. CMBS investors got hammered during the Great Recession, so conduit lenders now use a commercial loan underwriting ratio that few other commercial lenders use. This ratio is the Debt Yield Ratio.
Ever feel useless?
A Debt Yield Ratio of 9% limits many conduit loans to a maximum loan-to-value ratio of around 65% to 68%. This is not the the kind leverage that most investors are seeking. As a result, conduit loan originations in the past several years have been no more than 40% of their pre-2008 loan volume.
We will cover Commercial Banks, Credit Unions, Wall Street Non-Prime Lenders, Bridge Lenders, and Hard Money Lenders in coming blog articles.