The 4 Types of Commercial Real Estate Lenders
Updated: Sep 19
Rick Dimidjian President & Broker of Record
Camryn Ruby Director of Marketing & Business Development
9 Sept 2022
Commercial Real Estate Lenders are lifesavers to commercial real estate investors. Most, if not all, commercial real estate investors will need to master debt placement to excel in real estate investing. However, utilizing debt may look different depending on what type of commercial property and lender you choose. It is important to think about your options and truly know the value of each type of commercial real estate lender. Some lenders are more risk averse than others, and they will evaluate you and your company differently.
1. Commercial Banks
Commercial banks are the most well-known commercial real estate lenders. They are often big banks like CHASE, Wells Fargo, etc. They can also be small banks and credit unions. Banks get their funds from depositors and then lend that money out to CRE investors. The commercial bank earns interest on the money they lend out. This type of commercial bank lending is often referred to as a balance sheet lender because they keep that loan on their balance sheet instead of selling them out on the
secondary market. Now, with banks, it is common to see more recourse loans than non recourse loans, which means the borrower will be responsible for any loan money left unpaid in cases of default. Banks are also much more flexible in their terms, which can be a positive for the CRE investor. Banks are known for being relationship-focused, so you can develop mutual trust and eventually negotiate terms. Some examples of negotiable points are longer interest-only periods, waiving prepayment penalties, and other terms that come with long-term business with banks. Typical lending sizes are between $ 250,000 to $ 5 Million.
2. Insurance Companies
Another common CRE lender is an insurance company. Insurance companies, like Metlife Prudential and New York Life, generate their money through policyholder premiums. Once that money is received they turn around to lend out that money to CRE investors. Why are insurance companies historically great for CRE investors? This type of lender offers long-term, fixed-rate, non-recourse financing. They also make large, low-risk conservative loans. These types of loans are also referred to
as Large Trophy Assets. Some examples include large highrises, class A office buildings, major retail centers, and well-known luxury hotels. Why are insurance companies non-recourse lenders? Often, insurance companies care more about the performance of the specific property than the CRE investor’s personal balance sheet or the balance sheet of the company. Typical lending would be $ 2-$20 million.
3. Commercial Mortgage Backed Securities
The third type of CRE lender is commercial mortgage backed securities also known as CMBS. This loan is strictly regulated, much more than banks or insurance companies. An important trait of a CMBS is that the borrower must be a single-purpose entity (SPE). An SPE is an LLC or corporation that does not have other assets besides holding title to the property. CMBS lenders securitize loans by pooling a large number of mortgages into one security and then selling pieces of that security to the public market; hence why there are strict regulation structures associated with these loans.
CRE Investors and CMBS operate on a transactional basis.
Next, CMBS offer non-recourse loans, so they are not able to go after the barrow’s personal assets to pay off the loan balance. Of course, if the borrow is involved with fraud or bankruptcy then it can become a recourse loan. What should the CRE Investor pay attention to when choosing a CMBS? It is crucial to understand that these regulations have an enormous impact on the borrower's ability to prepay a CMBS loan. A CMBS loan may have a lengthy prepayment lockout window, which does not allow the borrower to prepay that loan at all during that lockout window. Even after that is over, there are significant prepayment penalties for borrowers trying to pay before that maturity date. So, the CRE Investor needs to be certain they can hold that property and keep that loan for the entire duration of its term. Typical deal sizes are $ 2-$20 Million.
4. Agency Financing
The agency financing options for CRE investors are highly regulated, and standardized, and are government-sponsored enterprises. They are highly regulated and standardized because they are sold to the secondary market. So, prepayment penalties are very similar to the CMBS structure. Agency financing offers non-recourse loans but can turn into recourse loans if the investor is involved with fraud or bankruptcy. Agency financing begins to differ from the CMBS because they partner with private lending institutions that too follow strict agency guidelines, like Wells Fargo. These private lending institutions are called designated underwriters/servicers (DUS). Agency financing was originally created to spur sectors of the US economy, like residential housing.
Agency financing loans fund their loans on multifamily properties and offer extremely competitive terms. They are most competitive on pricing. So, if a multifamily investor can meet those strict guidelines, then agency financing is a great route. Typical deal size is $ 2-$20 Million.
Which is best?
Choosing a lender mainly depends on what type of investment property the CRE investor has. If the investor places great value on trust and relationship building, banks would be a great source as long as the investor has a clean and strong portfolio. An investor who is going into a low-risk, but historically successful type of property like a popular hotel or major retail center should look into a large competitive loan like insurance companies offer. Finally, if the investor is confident that they can make fixed rate payments once the loan has matured, they should look into the CMBS or agency financing options. Understanding the difference between all 4 types of lenders is crucial to your success in CRE investing. Each lender focuses on different aspects of the investor and the property. The more an investor understands their options and their financial situation, the greater the success rate; so stay involved and keep referencing our blog posts to learn more.
Aegis Realty Partners Real Estate Investment specialists are well-positioned to advise our investors to seek out new real estate acquisitions as well as assist real estate investors when it comes to selling their properties, and can advise investors on some of the most attractive financing options for their acquisition or refinancing needs.
Aegis Realty Partners Property Management services manages thousands of square feet of commercial property and over 1000 residential units, and there isn't a type of property that we are not familiar with. If you or you know of any investor that needs assistance in choosing a property to invest or manage in we are willing to discuss our professional investment brokerage and/or management services. We are in constant communication with investors actively looking to buy, sell, and lease properties.
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Working with Aegis Property Management has been a great experience. Back when we first brought Aegis on board, we were trying to navigate a financial mess the developer and the initial management company had left us with. Rick and Chris were patient with us. Aegis proactively created and executed multiple recovery plans, which solved our buildings’ dire needs. While implementing the plans, Aegis maintained full transparency and organized our business back to speed. Today, our building is on firm footing, and our tenants' needs are handled quickly and professionally.
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