There are different types of commercial lenders that will lend you money for your projects. The type of lender you use will depend on several factors: property type, LTV, amortization, recourse, interest rates, closing time, and other factors.
Let’s take a look at the top commercial lenders on the market.
Directed Lenders
These CMBS (Commercial Mortgage Backed Securities) are long-term, fixed-rate financing that is generally permanent and non-recourse.
portfolio lenders
Banks or Savings and Loans
They have shorter terms (3-5 years) with fixed or variable rates. They are typically for permanent and construction financing and are full recourse.
credit companies
They offer long or short-term financing with a fixed or variable rate. As well as permanent and construction.
Life Companies
These commercial lenders are institutional grade with long-term, fixed-rate financing. Loans are generally permanent and non-recourse.
Government Sponsored Enterprise (GSE)
Fannie Mae/DUS and Freddie Mac
Fannie Mae and Freddie Mac are purchase loans from commercial lenders. Rates for multi-family apartments for 5+ are comparable to CMBS loans, but are properties that would not otherwise qualify.
FHA HUD 223(f)
FHA loans are backed by the United States government. They offer higher LTVs and better terms and rates on multi-family apartments larger than 5 units for properties that would not otherwise qualify.
Small Business Administration (SBA)
Backed by the US government, these are loans for more than 51% of owner-occupied properties.
Non-bank Lenders
These types of loans are also known as declared income, low or no documentation, private money, and hard. These loans are more flexible with quick closings (great if you’re struggling to get financing). But they also tend to have higher interest rates and back-end or participation fees.
According to the Mortgage Bankers Association of America, about 20% of commercial mortgage loans made in the US are conduit, 20% are made with commercial banks, 20% are made with life insurance companies, 13% with Fannie Mae and 8% with FHA. The top commercial/multi-family originators in 2005 were:
- Wachovia for Commercial Banks/Thrifts and Conduits
- Capmark Financial Group for Freddie Mac and FHA/Ginnie Mae
- MetLife for life insurance companies
- Deutsche Bank Berkshire for Fannie Mae
- TIAA-CREF for pension funds
- Cohen Financial for credit companies
- Key Bank for REITs, Mortgage REITs, Mutual Funds and Other Investors
- Tremont Realty Capital, LLC for Specialty Finance Companies
In general, there are basically two types of commercial lenders in the market: those who hold the loan in your balance (portfolio lenders) and those who sell the loan in the secondary market (conduit lenders). The secondary market represents Wall Street funds, also known as commercial mortgage-backed securities (CMBS).
A portfolio lender makes its profit from the spread or margin above the interest rate index. A conduit lender makes its profit based on the difference of what the bond can sell for on Wall Street and the sum value of all the loans in the pool. That’s the main reason why broker-dealer lenders can price a commercial mortgage loan more aggressively than a portfolio lender.
So which lender is the best for you?
Well, that depends. It really depends on your project and investment strategy. So ask yourself a few questions:
- Is this a development project or is it fully developed?
- What are your short and long term plans for the property?
- What are your interest rate needs?
- As you build equity, will you want to refinance?
Portfolio loans have fixed-rate structures, such as loans that are fully amortized, with no calls or balloons tied to a long-term, historically stable rate. Portfolio loans may better meet the needs of rehabilitation or development projects.
Conduit loans are good for properties that are stable with good tenants (such as NNN properties). They offer low fixed rates with long amortization and no recourse. While both portfolio and conduit lenders may have a performance lock-in and maintenance period, conduit loans also have discharge issues if the loan is refinanced. This is because if the loan is refinanced, the loan is removed from the pool of loans backing the bond, which changes the risk structure of the bond. As such, the borrower has to pay to hold another bond with similar risk, yield, duration, and payment priority in lieu of their loan. Conduits also do not allow secondary financing and have high prepayment penalties. Conduit lenders are not known for moving quickly, typically taking 4-6 months to close.
In general, regardless of the size of the loan, the fees to make the loan (closing and third party costs) are the same for pipeline and portfolio lenders.
Because there are so many different factors when looking for a commercial lender, it really pays to have a good commercial mortgage broker on your team who can give you the knowledge you need to find the best lender for you.