Commercial Mortgages: Private equity firms are lending

The credit crunch is real and it has been devastating for commercial real estate owners. Traditional lenders like big banks, Wall Street stockbrokers, Hartford insurance companies, and the financial arms of large multinational corporations (i.e., GMAC) have stopped originating any and all unsecured loans. They can be sold to the government or to the bond market. Government sponsored companies like Fannie Mae, Freddie Mac, Ginnie Mae, HUD (Housing and Urban Development) and FHA (Federal Housing Administration) are doing the work of the Yeomen by providing as much liquidity as they can, but the bond market has pretty much ceased to function as a provider of capital. There is still a massive shortage of money to lend. Hundreds of billions of good quality deals that should be funded are being turned down.

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

Private equity firms are opportunistic investment companies created to invest the wealth of their backers 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 options. Many private equity firms are flush with cash and 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 projects.

Very few private equity firms are established to be exclusively commercial mortgage lenders. Most of them are designed to use sophisticated leveraged buyout strategies to acquire other successful businesses. However, many firms have real estate divisions that make loans and/or take equity positions on good deals they find. These companies typically have a degree of experience in commercial real estate and have a healthy appetite for mortgage debt.

Private equity firms are very opportunistic and seek very high returns. They charge teen interest rates and add several origin points as well. Private loans are not cheap, but they are available to borrowers with attractive offers. Additionally, private equity firms generally lend based on the amount of equity in the collateral property; 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 shop.

Private equity is highly protective of your investment capital; they demand a significant amount of equity in any deal they finance. It is extremely rare for the amount of a private equity loan to exceed 70% of the value of the target property. Most of the loans they make are “bridge” type loans that mature in 12-36 months. Before lending money, they must be sure that the borrower has a viable exit strategy.

With banks and other big lenders out of the picture, private equity is stepping in to take advantage of the huge market for commercial real estate mortgage loans. 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 relationships with private equity will need to use intermediaries, agents or consultants who have Wall Street experience to obtain the excess.