by Robert Amter – Colorado Real Estate Journal – October 21, 2015 – November 3, 2015

Nonbank lenders are becoming increasingly active in providing significant capital for the commercial real estate market.  This group of lenders – also called hard-money lenders, bridge lenders or private capital lenders – has undergone significant changes since the end of the Great Recession of 2008 to 2010.

Today’s new breed of private money lenders is far different from the exorbitantly priced hard-money lenders of old.  An unprecedented amount of capital is now becoming available for commercial real estate loans that do not fit inside the sometimes narrow box that traditional bank and life insurance company lenders are willing to consider.  Just a few years ago, these types of loans were only offered by a small number of companies.  Now, significant amounts of capital are being deployed by hedge funds, private equity funds, pension funds and a variety of other sources into the asset-based commercial real estate lending arena.

These nonbank lenders offer viable alternative to traditional commercial real estate lenders.  They are able to fund large loans in amounts that used to be the exclusive province of banks and life companies.  The new breed of nonbank lenders still bases its underwriting decisions using a conservative loan-to-value ratio as opposed to bank lenders that focus more on credit-based and cash-flow based criteria.  Typically they may limit their loans to 60 to 65 percent of the appraised value instead of the higher LTV standards required by banks.  However, they provide simplified application and underwriting standards, and they make decisions much more quickly than traditional commercial lenders, funding their loans in a matter of weeks (or sometimes even days) instead of the much longer funding times required by banks.

Because of their asset-based focus, these nonbank lenders are willing to consider non-recourse loans on commercial real estate, whereas banks are typically reluctant to do so.  They are also willing to lend against raw land and properties that do not have the debt service coverage required by banks and life companies.  They base their loans primarily on the value of the real estate that secures the loan and do not typically have the endless covenants that banks love to put in their commercial real estate loans.  They make decisions quickly, close quickly and have minimal red tape.

Interest charges by nonbank lenders vary depending on the size of the loan and the size of the lender.  Large institutional sources such as hedge funds and private equity funds can offer rates from 6 to 8 percent.  However, they typically are not willing to fund loans under a centain minimum size, often in the multi million dollar range.  Local nonbank lenders may charge slightly higher rates than the large semi-institutional national private capital lenders, but today their rates are far lower than the rates that used to be standard for private money lenders.

If a commercial borrower requires creativity and flexibility in finding the right loan, then it would be worthwhile for it to look at the new breed of nonbank lenders that is becoming an increasingly influential factor in the commercial real estate capital markets.