Understanding the different types of commercial lenders
There are different types of commercial lenders who will loan you money for your projects. The type of lender you use will depend on several factors: property type, LTV, amortization, resource, interest rates, closing time, and other factors.
Let’s take a look at the top commercial lenders on the market.
These CMBS (Commercial Mortgage Backed Securities) are long-term, fixed-rate financing that is generally permanent and non-recourse.
Banks or Savings and Loans
They have shorter terms (3-5 years) with fixed or variable rates. They are generally for permanent and construction financing and are full recourse.
They offer long or short term financing with a fixed or variable rate. As well as permanent and under construction.
These commercial lenders are institutional quality with long-term, fixed-rate financing. Typically, the loans are permanent and non-recourse.
Government sponsored company (GSE)
Fannie Mae / DUS and Freddie Mac
Fannie Mae and Freddie Mac are purchase loans from commercial lenders. Rates for multi-family apartments over 5 years 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 of 5+ units for properties that would not otherwise qualify.
Small Business Administration (SBA)
Backed by the US government, these are loans for owner-occupied properties greater than 51%.
These types of loans are also known as declared income, low or no doc, private and hard money. These loans are more flexible with quick closings (great if you are struggling with financing). But they also tend to have higher interest rates and participation or back-end fees.
According to the Mortgage Bankers Association of America, approximately 20% of commercial mortgage loans that are made in the US are with conduits, 20% are made with commercial banks, 20% are made to insurance companies of life, 13% with Fannie Mae and 8% with the FHA. . The top commercial / multifamily creators in 2005 were:
- Wachovia for commercial banks / savings institutions 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 Business Credit
- 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 on the market: those who keep the loan in balance (portfolio lenders) and those who sell the loan on the secondary market (conduit lenders). The secondary market represents Wall Street funds, also known as commercial mortgage-backed securities (CMBS).
A portfolio lender earns its profit from the margin or margin above the interest rate index. A conduit lender makes its profit based on the difference between the price for which it can sell the bond on Wall Street and the value of the sum of all the loans in the pool. That’s the main reason conduit lenders can price a commercial home 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 some questions:
- Is this a development project or is it fully developed?
- What are your short-term and long-term plans for the property?
- What are your interest rate needs?
- As you build capital, will you want to refinance?
Portfolio loans have fixed-rate structures, such as full-amortization, no-call, or balloon loans tied to a historically stable long-term index. Portfolio loans can 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 are without recourse. While both portfolio and conduit lenders may have a period of lock-in and performance maintenance, conduit loans also have cancellation issues if the loan is refinanced. This is because if the loan is rolled over, you are withdrawing the loan from the pool of loans backing the bond, thus changing the risk structure of the bond. As such, the borrower has to pay for another bond with a similar risk, yield, duration, and payment priority to be placed in place of their loan. The conduits also do not allow secondary financing and have high prepayment penalties. Conduit lenders are not known for being quick, typically taking 4-6 months to close.
Generally, regardless of the size of the loan, the fees to make the loan (closing and third-party costs) are the same for portfolio and conduit 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.