Commercial Mortgage Loans – What Rates Do Hedge Funds Charge for Commercial Mortgages?
The ongoing credit crunch has made it much more difficult for investors to qualify for an institutionally financed (bank, broker, insurance company) commercial mortgage loan. Underwriting standards became significantly stricter and loan parameters tightened. Very few deals are accepted by banks and even fewer close.
Many good loans that need to get funded are rejected immediately. We call this situation a “funding gap”.
Recently, many hedge funds and private equity firms have recognized that there is an opportunity for firms that can help fill the funding gap by offering private commercial mortgages to quality borrowers who have been turned off by their banks. Over the past 18 months, financial managers have committed hundreds of millions of dollars to the commercial real estate finance sector. They buy distressed mortgages directly from distressed lenders and are very willing to make new loans against commercial buildings and development projects.
But before commercial real estate investors look to a hedge fund or other private lender for a loan, there are some important things they should know.
Private commercial mortgage lenders are opportunistic investors; A hedge fund is in business to earn high returns for its investors in a timely and efficient manner. The loans they offer will be short-term in nature (rarely longer than 36 months) and carry significantly higher interest rates and origination points than a Wall Street bank or broker. Also, hedge funds will be very aggressive in foreclosure situations; they will take your property if you fail to comply.
Funds and private lenders we work with currently charge 10%-15% annual interest with 3-4 basis points. This means borrowers can expect to pay 13%-19% APR. In addition, borrowers are responsible for the cost of any third-party reports that may be required, such as appraisals, environmental assessments and feasibility reports.
On the plus side, there is capital available for these private commercial mortgage loans and deals can be closed very quickly. Most funds prefer income-producing commercial properties owned by investors, such as apartment complexes, office buildings or warehouses. They will typically lend up to 65% of the property’s value, and the underwriting is based on equity, not credit. They will lend for both purchase and refinance, but private loans are “bridge” loans and there needs to be a viable, realistic exit strategy. In other words, they will need to know exactly how they will be paid.
This credit crunch has been devastating to the commercial real estate industry, and the problems aren’t going away. While we all wait for the situation to improve, private lenders, including Wall Street hedge funds and private equity firms, have money and are ready to lend it.
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