by Paul Long
September 11, 2019
Commercial Real Estate Brokers have many types of Real Estate Finance experts at their disposal when closing a transaction and I am sure that there are quite a few commercial bankers in your contact list. You should look through your financing experts and make sure that you have at least 1 of the following and know when to use them.
Before we get into the types, make sure to interview the banker that you chose to work with from each of these institutions. Often the banker can be more important than the institution itself. You should hear in the community what banks is doing deals and don’t be afraid to look the institution up on LinkedIn to find a great banker for that option. Make sure to find a banker that has solid experience in commercial real estate lending. If you leave it to chance, you may get a kid out of school and your deal is the first they have done. I am guessing that won’t end well for your client, even on the simplest of deals.
LARGE BANKS– Working with large banks are great for transactions that are above $15 Million as well as those clients than need international services or require a branch on every corner. Another benefit of using large banks is that they can provide the lowest rates since they have more capital. On the flip side, they are known for a one-size-fits-all approach to lending. They are usually not known for the speed on closing deals as well as talking to a decision maker can be a challenge. Also, larger banks at times have “loan specials” and can provide teaser rates that only a few will qualify for.
REGIONAL BANKS- Regional Banks also have a great place in the market as they are more focused on the middle market (annual sales around $100 million to $3 billion) These institutions look for clients who will buy properties from $10-15 Million and be able to provide semi local decision making as well as they can provide great business banking services. Like large banks, it can be difficult to talk with a decision maker about the deal and they usually stick with certain types of industries that they primarily work with.
COMMUNITY BANKS/CREDIT UNIONS– Community Banks can be great for those clients who are looking for a long-term relationship and want to be able to talk to a decision maker about their deal. Community Banks primarily work with clients with annual sales below $50 Million and like to work on deals from $50,000- $10 Million. Often time’s community banks will ask for more information from the borrower, but you will also get competitive interest rates and quick turnarounds. Also, Community Banks will look to lend, but also wants you to bring over deposits and other business banking products and the deposits are how they get capital to fund loans.
Credit Unions (the ½ option) are generally new to the commercial lending arena as credit unions are primarily focused on consumer lending and banking. Some credit unions are actively working in the same space as community banks when it comes to business lending. They can provide low rates and great customer service. However, there is a lot of talk about Credit Unions playing in this space as they have different regulatory rules than banks do, which is creating an unfair environment. Also, most credit unions don’t have the infrastructure to support the complexity of commercial loans, so closing quickly isn’t always an option.
SBA LENDERS– SBA Loans are great for owner occupied properties (51% occupied or greater) as they provide low down payments (10-15%) There are two very separate programs that can provide Real Estate Financing. The 7a program and the 504.
7a Real Estate- These are up to 25-year term/amortizations with no balloon loans. The downside of these is that the interest rate is generally variable, based on prime rate, so it’s not the best option when rates are increasing. However, if you are looking for a short time period (under 5 years) this is a good option as there is only a 3-year payment penalty.
504 Real Estate- These loans are most popular because there are two loans that get completed and one gives you a fixed (below market) interest rate for up to 25 years. The process can take a little longer as well as there is a 10-year pre-payment penalty. However, if you are looking for good long-term money for an owner-occupied business real estate purchase, this is a great solution.
FINANCE COMPANIES/NON-BANK LENDERS/ HARD MONEY- These lenders are backed by private funding. These lenders are fast and can close deals at times with no appraisal and as quick as a few days. Because of this benefit, interest rates are much higher than the market. These are great for deals that need to get done quickly, deals that are non-bankable (financials) or the property needs more “love and attention” than an institution is generally ok with. These originators are focused on the transaction, not the relationship.
It is important to know that there is plenty of overlap between all these options and every institution has different levels of comfortability with property types, rates, terms, concentration levels etc. Just make sure that you have a business card for each of these types of lenders in your contact list. It’s best to know these lenders on a first name basis before you have a transaction that they can help with.