There are different types of commercial lenders that will loan you money for your projects. The type of lender you use will be dependent on several factors: property type, LTV's, amortization, recourse, interest rates, time to close and other factors.
Lets take a look at the major commercial lenders in the market.
These CMBS (Commercial Mortgage Backed Securities) are long term, fixed rate financing that is typically permanent and non-recourse.
Banks or Savings & Loans
They have shorter terms (3-5 yrs) with fixed or variable rates. Usually they are for permanent and construction financing and they are full recourse.
They offer long or short term with fixed or variable rate financing. As well as permanent and construction.
These commercial lenders are institutional quality with long term, fixed rate financing. Typically the loans are permanent and non-recourse.
Government Sponsored Enterprise (GSE)
Fannie Mae / DUS and Freddie Mac
Fannie Mae and Freddie Mac are purchases loans from commercial lenders. The rates on 5+ multifamily apartments 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 & rates on 5+ unit multifamily apartments for properties that would not otherwise qualify.
Small Business Administration (SBA)
Backed by the US government, these are loans for 51% + owner occupied properties.
These types of loans are also known as Stated Income, Low or No doc, private and hard money. These loans are more flexible with fast closings (great if you're in a pinch for 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 done in the US are with conduits, 20% are done with commercial banks, 20% done with life insurance companies, 13% with Fannie Mae and 8% with FHA . The top commercial / multifamily originators in 2005 were:
- Wachovia for commercial bank / 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, investment funds and for other investors
- Tremont Realty Capital, LLC for specialty finance companies
In general, there are basically two types of commercial lenders in the market: those that hold the loan on their balance (portfolio lenders) and those that sell the loan into the secondary market (conduit lenders). The secondary market represents Wall Street funds, also known as Commercial Mortgage Backed Securities (CMBS).
A portfolio lender makes their profits from the spread or margin above the interest rate index. A conduit lender makes their profits based on the difference from what they can sell the bond for on Wall Street and the value of the sum of all of the loans in the pool. That is the main reason why conduit lenders are able to price a commercial mortgage loan more aggressively than a portfolio lender.
So which lender is the best for you?
Well … it depends. It really depends on your project and investment strategy. So ask yourself some questions:
- Is this a development project or is it fully developed?
- What are your short term and long term plans for the property?
- What are your needs in regards to interest rate?
- As you build equity, 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 rehab 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 are non-recourse. While both portfolio and conduit lenders may have a lock-out period and yield maintenance, conduit loans also have defeasance issues if the loan is refinanced. This is because if the loan is refinanced, you are pulling the loan out of the pool of loans that backs the bond, thus changing the risk structure of bond. As such, the borrower has to pay to have another bond with similar risk, yield, duration, payment priority put in place of their loan. Conduits also don't allow for secondary financing and have high pre-payment penalties. Conduit lenders are not known for moving quickly – typically taking 4 to 6 months to close.
Generally, regardless of the loan size, the fees for doing the loan (3rd 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 really pays to have a good commercial mortgage broker on your team, that can provide the know-how in getting the best lender for you.