Understand the Different Types of Business 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 rates, closing time, and other factors.

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

Targeted Lenders

These CMBS (Commercial Mortgage Backed Securities) are long-term fixed-rate financings that are generally 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 typically for construction and permanent financing and are full recourse.

credit companies

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

Life Companies

These commercial lenders are institutional quality with long term fixed rate financing. Loans are generally 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. Multi-family apartment rates for 5+ are comparable to CMBS loans, but are properties that would not otherwise qualify.

FHA HUD 223(f)

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

Small Business Administration (SBA)

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

Non-bank lenders

These types of loans are also known as declared income, low or undocumented, private and hard money. These loans are more flexible with quick closings (great if you’re hard-pressed to get financing). But they also tend to have higher interest rates and back-end or participation fees.

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

  • Wachovia for commercial banks/savings institutions 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 finance companies

In general, there are basically two types of commercial lenders in the market: those that keep the loan in its balance (portfolio lenders) and those that 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 profit 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 on Wall Street and the value of the sum of all the loans in the pool. That’s the main reason brokerage lenders can price a commercial mortgage loan more aggressively than a portfolio lender.

So which lender is the best for you?

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

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

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

Conduit loans are good for properties that are stable 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 and performance holding period, conduit loans also have discharge issues if the loan is refinanced. This is because if the loan is refinanced, the loan is removed from the pool of loans backing the bond, which changes the risk structure of the bond. As such, the borrower has to pay to have another bond with similar risk, yield, duration, payment priority in place of their loan. 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.

In general, regardless of the size of the loan, the fees to make the loan (closing and third-party costs) are the same for conduit and portfolio lenders.

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

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *