Commercial Mortgages – What Rates Do Hedge Funds Charge For Commercial Mortgages?

Due to the ongoing credit crisis, it has become much more difficult for investors to qualify for an institutionally financed (bank, broker, insurance company) commercial mortgage loan. Underwriting standards have tightened significantly and lending parameters have tightened. Very few deals are accepted by the banks, and even fewer are actually closed.


Many good loans that should receive financing are firmly rejected. We call this situation the ‘funding gap’.


Recently, many hedge funds and private equity firms have recognized that opportunities exist for companies that can help close the funding gap by offering private commercial mortgages to quality borrowers who have been left out by their banks. Over the past 18 months, asset managers have pledged hundreds of millions of dollars to the commercial real estate finance industry. They buy distressed mortgages directly from troubled lenders and are very willing to write new loans for commercial buildings and development projects.


But before commercial real estate investors seek a loan from a hedge fund or other private lender, there are some important things they should know.


Private commercial mortgage lenders are opportunistic investors; a hedge fund operates to provide high returns for its investors in a timely and efficient manner. The loans they offer are short-term (rarely more than 36 months) and will have significantly higher interest rates and starting points than a bank or Wall Street broker. Further, hedge funds will be very aggressive in foreclosure situations; they will take your property if you fail to perform.


Funds and private lenders we work with currently charge 10%-15% annual interest by 3-4 points. This means borrowers can expect an APR of 13%-19%. In addition, borrowers are responsible for the cost of any required third-party reports, such as appraisals, environmental assessments, and feasibility reports.


On the plus side, capital is available for these retail commercial mortgages and deals can be closed very quickly. Most funds prefer commercial properties owned by investors, such as apartment complexes, office buildings or warehouses. They will generally lend up to 65% of a property’s value and the underwriting is based on equity and not credit. They will borrow for both purchase and refinance, but private loans are “bridge loans” and a viable, realistic exit strategy must be in place. In other words, they need to know exactly how they will be reimbursed.


This credit crunch has been devastating to the commercial real estate industry and the problems will not go away. While we all wait for the situation to improve, private lenders, including Wall Street hedge funds and private equity firms, have cash and are willing to lend it.