Commercial Loans Blog

What Types of Lenders Are Making Commercial Loans?  Part 1

Posted by George Blackburne on Tue, Mar 19, 2019

Financial districtTwenty 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.

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Life Companies:

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.

 

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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.

 

Conduits:

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.

 

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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.

 

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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.

 

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Topics: Types of commercial lenders

What Kinds of Lenders Are Making Commercial Loans Today?

Posted by George Blackburne on Tue, Jun 12, 2012

If you need a commercial real estate loan, to whom should you submit your deal?  What kinds of lenders are making commercial loans today? 

There is a pecking order in the commercial financing industry.  The lenders with the very best commercial mortgage rates cream the market.  If a commercial loan won't qualify with the very cheapest commercial lender, the commercial mortgage deal then goes to the commercial lender with the next best commercial mortgage rates - and so on.  The pecking order is as follows:  life insurance companies, conduits (CMBS lenders), banks, savings banks and S&L's (known as thrifts), credit unions, mortgage REIT's, and finally hard money lenders.

Most mortals will never qualify for a commercial loan from a life insurance company.  Life companies, as they are called in the language of commercial mortgage finance, will seldom make commercial mortgage loans of less than $5 million.  The property either has to be almost brand new or located in a fllthy-rich commercial area, like in the financial district of Downtown San Francisco.  Life companies usually limit their commercial loans to just 50% to 55% loan-to-value, and they will not allow second mortgages behind their loans.  This means that a commercial property buyer would have to put down a minimum of 45% of the purchase price.  Yikes.  Like I said, few mortals will ever qualify for a commercial loan from a life company.

 

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Assuming you're a mortal like me, let's move on to the class of commercial lenders with the next best commercial mortgage rates - the conduits.  Conduits, also known as CMBS lenders, make large commercial first mortgages exclusively on very standard commercial properties - multifamily, office, retail, and industrial.  Conduits will also occasionally make loans on hospitality properties (hotels).  Like life companies, conduits prefer loans of larger than $5 million, although they will occasionally finance deals as small as $3 million.  Unlike the life companies, the commercial property does not have to be gorgeous or almost brand new.  Bread-and-butter commercial buildings will often qualify.  The typical conduit loan will have a terrific interest rate, just 30 to 50 basis points higher than that of a life company.  Loan-to-value ratios as high as 65% LTV are possible, and conduits will allow mezzanine financing behind their loans, as long as the "mezz piece" is arranged at the same time the permanent loan is arranged.

Commercial banks have the third-best commercial mortgage rates, and banks are making, by far, the largest number of new commercial real estate loans.  In fact, at least 75 out of every 100 new commercial loans originated in the last year were originated by a commercial bank.  Commercial banks will make commercial real estate loans as small as $150,000 to as large as $50 million or more.  The property needs to be functional and leased, but it does NOT have to be beautiful.  The borrower must be clean and strong, and it helps a lot if he has lots of cash in the bank.  Banks will even finance business properties, like motels, restaurants, and bowling alleys, as long as they are successful.

Savings banks and savings and loan associations (thrifts) are making very few commercial real estate loans today - so few that they are not even worth discussing.

I lied to you earlier.  I told you that commercial banks have the third-best commercial mortgage rates.  There is actually a class of commercial real estate lenders that has even better commercial mortgage rates than banks - credit unions.  Credit unions are brand new to the commercial real estate financing arena, and they have rates that are 30 to 40 basis points cheaper than commercial banks.  They will finance business properties, like self storage facilities and motels.  Credit unions have two important limitations - the property must be located close to the credit union and the maximum loan that you're likely to get from a credit union is around $1 million.  Credit unions only do small deals.

There are only two commercial mortgage REIT's actively making commercial real estate loans today, and their rates are no better than those of any other hard money lender.

Hard money lenders are making lots of commercial loans today.  Hard money lenders make one-to-three year bridge loans at high rates and high points.  Sometimes a borrower simply needs the money, perhaps to inject into his struggling company.  In such a case, hard money lenders, like Blackburne & Sons (my own company), can be very helpful.  Hard money commercial lenders will often make loans to borrowers with poor credit and/or struggling businesses, up to around 65% loan-to-value.

Bottom line:  Most commercial loans today are being written by either commercial banks or hard money lenders.  You can submit your commercial loan to 750 different commercial lenders in just four minutes using C-Loans.com   And C-Loans is free!

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Topics: Types of commercial lenders