Private / Specialty Lending
Private / Specialty Financing: At A Glance
|Loan Structure | History | Cross Collaterization | Commercial Private Lending Programs | Commercial Private Lending Industry | Private Lending Interest Rates | Private Lending Points & Fees|
TMG Capital West Financial offers private, niche lending and financing options for specialty real estate properties, projects and scenarios such as non-traditional residential loans, super jumbo residential loans, developer tailpiece build-outs, fractured condo or commercial developments, non-traditional commercial loans. Through our extensive capital network and funding capabilities, our private lending group leads the way in specialty and niche lending.
Our private money loan is a specific type of financing in which a borrower receives funds based on the value of a specific parcel of real estate to accomplish a time-sensitive transaction, to finance a specialty business or property, or relieve itself from potential distress. Private money loans have become very attractive for borrowers in today's restrictive lending climate and tight credit market. Due to the lack of financing availability from traditional institutional lenders, the flexibility, negotiable terms, quick underwriting and funding times offered by private money lending has quickly made it the financial instrument of choice to meet many borrower's needs.
Private money is similar to a bridge loan which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and not eligible to qualify for traditional institutional financing. Whereas private money often refers to not only an asset-based real estate loan with higher borrowing costs, but can be obtained for time-limited transactions or as solution to cure a distress. Private money loans have generally higher borrowing costs and are typically issued at higher interest rates than conventional commercial or residential real estate loans, and are almost never issued by a commercial bank or other deposit institution.
A private money loan is a species of real estate loan collateralized against the value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine loan or second lien.
Private money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60-70% of the market value of the property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.
Below is an example of how a commercial real estate purchase might be structured by a private money lender:
The underwriting of a private money loan weighs heavily the LTV (equity) of the collateralized asset (real estate), as the borrower's credit rating and income becomes secondary. The standard conventional underwriting guidelines of a borrower's credit, employment history, and debt-to-income ratios do not apply. The due diligence process places heavy emphasis on evaluating the business entity operating the property, operating history and capability, financial capacity to effectively carry the debt service, and the proper valuation of the site (property) itself.
Most private money and specialty loans are structured as balloon notes having a short term maturity due and payable in as low as 3 months to as long as 5 years. Private money and specialty lenders always considers their exit strategy during the lending process. The lender must be convinced that either the property can be sold or the borrower has the ability to obtain permanent take-out financing before maturity to payoff their loan.
Private money and specialty loans have either tiered-fixed rates that adjust annually or variable rates tied to the Prime or LIBOR index, and offer fully amortized or interest-only payment schedules. Most of these loans do not have any prepayment penalties to restrict advance principal reduction or early payoff, but some lenders will institute an initial lock-out period to protect their interest yield.
Private Money is a term that is used almost exclusively in the United States and Canada where these types of loans are most common. In commercial real estate, private money developed as an alternative "last resort" for property owners seeking capital against the value of their holdings. The industry began in the late 1950s when the credit industry in the US underwent drastic changes (see FDIC: Evaluating the Consumer Revolution).
The private money industry suffered severe setbacks during the real estate crashes of the early 1980s and early 1990s due to lenders overestimating and funding properties at well over market value. Since that time, lower LTV rates have been the norm for private money lenders seeking to protect themselves against the market's volatility. Today, high interest rates are the mark of private money loans as a way to protect the loans and lenders from the considerable risk that they undertake.
In some cases the low loan-to-values do not facilitate a loan sufficient to pay the existing mortgage lender off in order for the private money lender to be in first lien position. Because securing the property is the basis of making a private money loan, the first lien position of the lender is usually always required. As an alternative to a potential shortage of equity beneath the minimum lender LTV guidelines, many private money lender programs will allow a "Cross Lien" on another of the borrowers properties. The cross collateralization of more than one property on a private money loan transaction, is also referred to as a "blanket mortgage". Not all homeowners have additional property to cross collateralize. Cross collateralizing or blanket loans are more frequently used with investors on Commercial Private Money Loan programs.
Commercial Private Lending Programs
Commercial private money is similar to traditional private money, but may sometimes be more expensive as the risk is higher on investment property or non-owner occupied properties. Commercial Private Money Loans may not be subject to the same consumer loan safeguards as a residential mortgage may be in the state the mortgage is issued. Commercial private money loans are often short term and therefore interchangeably referred to as bridge loans or bridge financing.
Commercial Private Money Lender and Bridge Lender programs are similar to traditional private money in terms of loan to value requirements and interest rates. A commercial private money or bridge lender will usually be a strong financial institution that has large deposit reserves through a private or syndicated fund and the ability to make a discretionary decision on a non-conforming loan. These borrowers are usually not conforming to the standard Fannie Mae, Freddie Mac or other residential/commercial institutional conforming credit guidelines. The need to obtain a commercial private loan may be due to the property and or borrowers being in financial distress, or the commercial property may simply lack the funds to for construction completion, time-restricted challenges, or, most commonly, the inability to raise capital or secure institutional/bank financing..
Some Private Investment groups or Bridge Capital Groups will require joint venture or sale-lease back requirements to the riskiest transactions that have a high likelihood of default. Private Investment groups may temporarily offer bridge or private money, allowing the property owner to buy back the property within only a certain time period. If the property is not purchased back or sold within the time period the Private Money Lender may keep the property at the agreed upon price.
Traditional Commercial Private Money loan programs carry a high level of risk and have a higher than average default rate. If the property owner defaults on the commercial private money loan, the private money lender will assume protection against any incurred loss under the existing equity through foreclosure disposition. Since the equity is the major safeguard for a private lender, loans will almost always be made at lower LTVs.
Commercial Private Lending Industry
With less bureaucracy and regulation, the commercial private lending industry operates with particular speed and responsiveness, making it an attractive option for those seeking quick funding. However, this has also created a highly predatory lending environment where many companies refer loans to one another (brokering), increasing the price and loan points with each referral.Borrowers are advised not to work with private money lenders who require exorbitant upfront fees prior to funding in order to reduce this risk.
Private Lending Interest Rates
Private Money Mortgage loans are generally more expensive than traditional institutional mortgages. Generally a private money loan carries additional risk or for special circumstances that a borrower is aware of.
The rate is not dependent on the Bank Rate. It is instead more dependent on the real estate market and availability of private money credit. Currently and for the past decade private money has ranged from the 9% to 13% range. When a borrower defaults they may be charged a higher "Default Rate". Most loans have set tiered-fixed rates adjusting annually or have variable interest rates tied to the Prime or LIBOR index.
Private Lending Points & Fees
Points on a private money loan are traditionally one to three more than an institutional conforming
It is very common for a commercial private money loan to be upwards
of four points and as high as 10 points. The reason a borrower
would pay that rate is to avoid financial distress, to financing a specialty business or property or to accomplish a time-sensitive transaction with the property. Fees can include LOI (letter of interest) or commitment fees, underwriting and processing fees, due diligence and valuation fees, funding and legal fees. Most borrowers obtaining a private money loan will be responsible for all standard statutory third party fees
such as settlement and title charges, government recording fees, and certification/disclosure fees.
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Through our extensive capital network and funding capabilities, our private lending group leads the way in specialty and niche lending.