Who Is Making Commercial Loans Today?
August 23, 2021
If you need a commercial real estate loan, to whom should you submit your deal? What kinds of lenders are making commercial loans today?
There is a pecking order in the commercial financing industry. The lenders with the very best commercial mortgage rates cream the market. If a commercial loan won't qualify with the very cheapest commercial lender, the commercial mortgage deal then goes to the commercial lender with the next best commercial mortgage rates - and so on. The pecking order is as follows: life insurance companies, conduits (CMBS lenders), banks, savings banks and S&L's (known as thrifts), credit unions, mortgage REIT's, and finally hard money lenders.
Most mortals will never qualify for a commercial loan from a life insurance company. Life companies, as they are called in the language of commercial mortgage finance, will seldom make commercial mortgage loans of less than $5 million. The property either has to be almost brand new or located in a fllthy-rich commercial area, like in the financial district of Downtown San Francisco. Life companies usually limit their commercial loans to just 50% to 55% loan-to-value, and they will not allow second mortgages behind their loans. This means that a commercial property buyer would have to put down a minimum of 45% of the purchase price. Yikes. Like I said, few mortals will ever qualify for a commercial loan from a life company.
Assuming you're a mortal like me, let's move on to the class of commercial lenders with the next best commercial mortgage rates - the conduits. Conduits, also known as CMBS lenders, make large commercial first mortgages exclusively on very standard commercial properties - multifamily, office, retail, and industrial. Conduits will also occasionally make loans on hospitality properties (hotels). Like life companies, conduits prefer loans of larger than $5 million, although they will occasionally finance deals as small as $3 million. Unlike the life companies, the commercial property does not have to be gorgeous or almost brand new. Bread-and-butter commercial buildings will often qualify. The typical conduit loan will have a terrific interest rate, just 30 to 50 basis points higher than that of a life company. Loan-to-value ratios as high as 65% LTV are possible, and conduits will allow mezzanine financing behind their loans, as long as the "mezz piece" is arranged at the same time the permanent loan is arranged.
Commercial banks have the third-best commercial mortgage rates, and banks are making, by far, the largest number of new commercial real estate loans. In fact, at least 75 out of every 100 new commercial loans originated in the last year were originated by a commercial bank. Commercial banks will make commercial real estate loans as small as $150,000 to as large as $50 million or more. The property needs to be functional and leased, but it does NOT have to be beautiful. The borrower must be clean and strong, and it helps a lot if he has lots of cash in the bank. Banks will even finance business properties, like motels, restaurants, and bowling alleys, as long as they are successful.
Savings banks and savings and loan associations (thrifts) are making a few commercial real estate loans today. There are not many savings banks and S&L's left, but they are still lending. Generally S&L's and savings banks will make the exact same type of commercial loans as a bank; but there is an exception.
You don't need to be quite as wealthy to get a commercial loan from a savings bank, when compared to a bank. For example, if you tried to borrow $5 million from a bank to buy an office building, you would absolutely need a net worth of at least $5 million. The Net-Worth-to-Loan-Size Ratio would need to be at least 1.0. In contrast, a savings bank - if they really loved the leases in your office building - might loan you the full $5 million, even if your net worth was just $3.8 million. Why? Savings banks and S&L's historically specialized in real estate loans, as opposed to business loans. They have more expertise in commercial real estate than the typical bank, and if they really like your commercial property, they will often make you the loan.
I lied to you earlier. I told you that commercial banks have the third-best commercial mortgage rates. There is actually a class of commercial real estate lenders that has even better commercial mortgage rates than banks - credit unions. Credit unions are fairly new to the commercial real estate financing arena, and they have rates that 30 to 40 basis points cheaper than commercial banks. They will finance business properties, like self storage facilities and motels. Credit unions have two important limitations - the property must be located close to the credit union and the maximum loan that you're likely to get from a credit union is around $1 million. Credit unions prefer small deals, and although some of the larger credit unions are now making commercial real estate loans up to $20 million.
There are only two commercial mortgage REIT's actively making commercial real estate loans today, and their rates are no better than those of any other hard money lender.
Hard money lenders are making lots of commercial loans today. Hard money lenders make one-to-three year bridge loans at high rates and high points. Sometimes a borrower simply needs the money, perhaps to inject into his struggling company. In such a case, hard money lenders, like Blackburne & Sons (my own company), can be very helpful. Hard money commercial lenders will often make loans to borrowers with poor credit and/or struggling businesses, up to around 65% loan-to-value.
Bottom line: Most commercial loans today are being written by either commercial banks or hard money lenders. You can submit your commercial loan to 750 different commercial lenders in just four minutes using C-Loans.com. And C-Loans is free!
