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The credit squeeze is real and has been devastating to commercial real estate property owners. Traditional lenders such as large banks, Wall Street brokers, Hartford insurance companies and the financial arms of large multinational corporations (i.e. GMAC) have stopped originating any and all loans that can’t be sold to the Government or to the bond market. Government Sponsored Enterprises like Fannie Mae, Freddie Mac, Ginnie Mae, HUD (Housing & Urban Development) and FHA (Federal Housing Administration) are doing yeomen’s work providing as much liquidity as they can but the bond market has virtually stopped functioning 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 away.
Desperate commercial real estate investors are scrambling to find lenders actually willing to lend. Borrowers seeking alternative funding sources are increasingly turning to entities know as private equity firms to secure the funding they need.
Private equity firms are opportunistic investment companies set up to invest the wealth of their sponsors and investors. They are similar to hedge funds in many respects but are structured somewhat differently and can often be more flexible and creative in their investment choices. Many private equity companies are flush with cash and hungry for good deals. Developers and property owners that have relationships with private equity firms enjoy a reliable source of money for their real estate ventures.
Very few private equity companies are set up to be commercial mortgage lenders exclusively. Most of them are designed to use sophisticated leveraged-buy-out strategies to acquire other successful businesses. However, many firms have real estate divisions that make loans and / or take equity positions in good deals they come across. These firms usually have a degree of expertise in commercial real estate and have a healthy appetite for mortgage debt.
Private equity firms are highly opportunistic and seek very high returns. They charge interest rates in the teens and tack on several origination points as-well. Private loans are not cheap, but they are available to borrowers who have attractive deals. Further, private equity companies 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 an equity based loan from a private equity shop.
Private equity is highly protective of their investment capital; they demand a significant amount of equity in any deal they fund. It is exceedingly rare for a private equity loan amount to exceed 70% of the value of the target property. Most loans they make are “bridge” type loans that mature in 12-36 months. Before they lend money they must be confident that the borrower has a viable exit strategy.
With the banks and other big lenders out of the picture, private equity is stepping in to take advantage of the huge market in commercial real estate mortgage lending. For borrowers fortunate 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 intermediary, agent or consultant that has Wall Street experience in-order-to gain excess.
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