Commercial Mortgages – Private Equity firms lend

The credit crunch is real and has had a devastating impact on commercial property owners. Traditional lenders such as major banks, Wall Street brokers, Hartford insurance companies and the financial arm of large multinational corporations (i.e. GMAC) have stopped making loans that cannot be sold to the government or the bond market. Government-sponsored corporations such as Fannie Mae, Freddie Mac, Ginnie Mae, HUD (Housing & Urban Development) and FHA (Federal Housing Administration) do their job by providing as much liquidity as possible, but the bond market has virtually ceased to function as a provider of capital . There is still a huge shortage of money to borrow. Hundreds of billions of good quality deals that should be funded are being rejected.

Desperate commercial real estate investors struggle to find lenders who are actually willing to lend. Borrowers seeking alternative sources of financing are increasingly turning to entities known as private equity firms to secure the financing they need.

Private equity firms are opportunistic investment companies formed to invest the wealth of their sponsors and investors. They are similar to hedge funds in many ways, but are structured somewhat differently and can often be more flexible and creative in their investment choices. Many private equity firms have a lot of money and are hungry for good deals. Developers and property owners who have relationships with private equity firms enjoy a reliable source of money for their real estate ventures.

Very few private equity firms are set up to be solely commercial mortgage lenders. Most of them are designed to use sophisticated leveraged buyout strategies to take over other successful companies. However, many companies have real estate divisions that provide loans and/or take equity positions in good deals they come across. These companies usually have some level of expertise in commercial real estate and a healthy appetite for mortgage debt.

Private equity firms are very opportunistic and aim for very high returns. They charge interest rates in the teens and tackle different starting points as well. Private loans are not cheap, but they are available to borrowers who have attractive deals. Further, private equity firms generally borrow based on the amount of equity in the collateral; their loans are not credit driven. Many borrowers with less than perfect credit are surprised to learn that they can still qualify for a stock-based loan from a private equity store.

Private equity protects their investment capital to a high degree; they demand a significant amount of equity in every deal they finance. It is rare for a private equity loan to exceed 70% of the value of the target property. Most of the loans they provide are “bridge” type loans that mature in 12-36 months. Before borrowing money, they must be confident that the borrower has a viable exit strategy.

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With the banks and other big lenders out of the picture, private equity is stepping in to take advantage of the huge commercial real estate mortgage lending market. For borrowers lucky enough to know where to find them and how to approach them, private equity can provide all the funds they need. Borrowers without established private equity relationships will need to use a broker, agent, or advisor with Wall Street experience to get a deductible.