Understand the different types of commercial lenders

Understand the different types of commercial lenders

Understand the different types of commercial lenders

There are different types of commercial lenders that will lend you money for your projects. The type of lender you use will depend on several factors: property type, LTV, amortization, recourse, interest rate, closing time, and other factors.

Let’s take a look at the top commercial lenders on the market.

Conduit lenders

These CMBS (Commercial Mortgage Backed Securities) are long-term, fixed-rate financing that is typically permanent and non-recourse.

Portfolio lenders
Banks or Savings and Loans

They have shorter terms (3-5 years) with fixed or variable rates. They are usually for permanent and construction financing and are fully resourced.

Credit companies

They offer long-term or short-term financing with fixed or variable rates. As well as permanent and construction.

Life companies

These commercial lenders are of institutional quality with long-term, fixed-rate financing. Loans are usually permanent and non-recourse.

Government Sponsored Enterprise (GSE)
Fannie Mae/DUS and Freddie Mac

Fannie Mae and Freddie Mac are purchase loans from commercial lenders. Rates on multi-family apartments over 5 are comparable to CMBS loans, but they are properties that would not otherwise qualify.

FHA HUD 223(f)

FHA loans are backed by the US government. They offer higher LTVs and better terms and rates on 5+ unit multi-family apartments for properties that would otherwise not qualify.

Small Business Administration (SBA)

Backed by the US government, these are loans for more than 51% owner-occupied properties.

Non-bank lenders

These types of loans are also known as declared income, low or no document, private and hard money. These loans are more flexible with fast closings (great if you’re struggling to finance). But they also tend to have higher interest rates and participation or back-end fees.

According to the Mortgage Bankers Association of America, about 20% of commercial mortgage loans made in the US are with conduits, 20% are made with commercial banks, 20% with life insurance companies, 13% with Fannie Mae and 8% with FHA. . The top commercial/multifamily builders in 2005 were:

  • Wachovia for commercial banks/thrifts and conduits
  • Capmark Financial Group for Freddie Mac and FHA/Ginnie Mae
  • MetLife for Life Insurance Companies
  • Deutsche Bank Berkshire for Fannie Mae
  • TIAA-CREF for pension funds
  • Cohen Financial for credit companies
  • Key bank for REITS, mortgage REITs, mutual funds and other investors
  • Tremont Realty Capital, LLC for specialized financial companies

In general, there are basically two types of commercial lenders in the market: those who hold the loan in their balance (portfolio lenders) and those who sell the loan on the secondary market (conduit lenders). The secondary market represents Wall Street funds, also known as Commercial Mortgage Backed Securities (CMBS).

A portfolio lender makes its profits from the spread or margin above the interest rate index. A conduit lender makes its profit based on the difference between what the bond can sell for on Wall Street and the sum of all the loans in the group. This is the main reason why conduit lenders can price a commercial mortgage loan more aggressively than a portfolio lender.

So which lender is best for you?

Well…it depends. It really depends on your project and investment strategy. So ask yourself some questions:

  1. Is it a development project or is it fully developed?
  2. What are your short and long term plans for the property?
  3. What are your interest rate needs?
  4. As you build equity, will you want to refinance?

Portfolio loans have fixed rate structures, such as fully amortized, no-call or balloon loans tied to a historically stable long-term index. Portfolio loans can better meet the needs of rehabilitation or development projects.

Conduit loans are good for stable properties with good tenants (such as NNN properties). They offer low fixed rates with long amortization and no recourse. While both portfolio and conduit lenders may have a lock-in period and performance maintenance, conduit loans also have cancellation issues if the loan is refinanced. This is because if the loan is refinanced, you are removing the loan from the pool of loans backing the bond, thereby changing the bond’s risk structure. As such, the borrower must pay to replace his loan with another bond with similar risk, yield, duration and payment priority. Conduits also do not allow secondary financing and have high prepayment penalties. Conduit lenders are not known for moving quickly, typically taking 4-6 months to close.

Generally, regardless of loan size, loan origination fees (third-party and closing costs) are the same for conduit and portfolio lenders.

Because there are so many different factors when looking for a commercial lender, it pays to have a good commercial mortgage broker on your team, who can provide you with the knowledge you need to get the best lender for you.

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