Commercial Mortgage Loans – What Rates Do Hedge Funds Charge For Commercial Mortgages?
The ongoing credit crunch has made it difficult for investors to qualify for an institutionally funded commercial mortgage (bank, broker, insurance company). Underwriting standards have become more stringent and loan standards have been tightened. Very few deals have been accepted by the banks, and even fewer of those deals are actually closed.
Many good loans that should get you financing are rejected immediately. We call this situation the “funding gap”.
Recently, many hedge funds and private equity firms have recognized that opportunity exists for companies that can help bridge the financing gap by offering private commercial mortgages to high-end borrowers who have been closed out by their banks. Over the past 18 months, money managers have committed hundreds of millions of dollars to the commercial real estate finance sector. They buy distressed mortgage papers directly from distressed lenders and are very willing to write new loans against commercial buildings and development projects.
But before commercial real estate investors seek a loan from a hedge fund or other private lender, there are a few important things they should know.
Private commercial mortgage lenders are opportunistic investors; A hedge fund works to achieve high returns for its investors in a timely and efficient manner. The loans they offer will be short-term in nature (rarely more than 36 months) and will carry much higher interest rates and origination points than banks or a Wall Street broker. Furthermore, hedge funds will be very aggressive in foreclosures; They will take your property if you fail to perform.
The funds and private lenders we currently work with charge an annual interest of 10% to 15% at 3-4 pips. This means that borrowers can expect to pay 13%-19% APR. Furthermore, the borrowers are responsible for the cost of any third party reports that may be required such as appraisals, environmental assessments and feasibility reports.
On the plus side, there is capital available for these private commercial mortgages and deals can close very quickly. Most funds prefer commercial income-generating buildings owned by investors such as apartment complexes, office buildings or self-storage facilities. They will generally lend up to 65% of the property value and underwrite on an equity basis rather than credit. They will lend to both purchase and refinance, but private loans are “bridge” loans and there needs to be a realistic and workable exit strategy. In other words, they will need to know exactly how they will be paid back.
This credit squeeze has been devastating to the commercial real estate industry and the problems remain. While we are all waiting for the situation to improve, private lenders, including Wall Street hedge funds and private equity firms, have the liquidity and are willing to lend it.