Once investors decide to purchase commercial real estate, they often find themselves caught between traditional financing and alternative lending options. While on the surface it appears these two groups of lenders are different only in the rates and fees charged (traditional lenders offer lower rates and typically charge lower fees) – it’s important to understand both fundamental and nuanced differences between the loan products offered. Understanding the key differences will help borrowers make the best financing decisions for their commercial property investments.
Most importantly, understanding which type of lender is suited to your project early on can save critical time and make the difference between satisfying a financing contingency on a purchase and sale agreement and losing the acquisition opportunity.
Traditional Lenders: Less underwriting flexibility
Banks, life insurance companies and CMBS conduits have very strict credit policies. Loan requests are reviewed and approved by credit committees staffed by credit trained risk managers. Any lending policy exception must be fully documented and defended and thus loan officers may not have the will to bring marginal deals to committee.
Alternative Lenders: More underwriting flexibility
While alternative lenders certainly have underwriting guidelines, as less-regulated entities they have the ability to make deal specific policy exceptions. Plus, as there is so much competition among specialty lenders, private equity real estate funds, marketplace lenders and hard money lenders, they are more likely to structure a loan to fit your needs than to look for reasons to say no.
Traditional Lenders: Good credit required
Among traditional lenders, a strong personal credit history is required. In the absence of appropriate net worth and liquidity, a guarantor may also be required.
Alternative Lenders: Below average personal credit score not a deal breaker
Borrowers with good to marginal personal credit may qualify for loans with some alternative lenders. In fact many lenders are purely asset-based and will not require tax returns or personal financial statements.
Traditional Lenders: Top metropolitan areas
For national lenders, the financed property must typically be in a “primary” or “secondary” market which includes the top 150 metropolitan statistical areas. While community banks and credit unions will lend at a very local level, they will only lend within their specific geographic “footprints” as defined by their branch networks.
Alternative Lenders: Smaller cities and towns considered
With thousands of alternative lenders nationwide, specialized properties in smaller markets can be financed.
Traditional Lenders: Will write loans secured by office, retail, lodging and industrial real estate with terms of 5-10 years. Loans for apartment buildings that meet the requirements of federal housing agencies can be secured for terms out to 20 years.
Alternative Lenders: Will consider terms as short as six months to as long as 30 years.
TIME TO CLOSE
Traditional Lenders: 45 – 90 days
Alternative Lenders: As little as two weeks
Our goal is to get you the loan you want when you need it. We’ll find the best rates and the best terms available. By providing information about the process and the types of loan products offered, we want to help our customers make smart decisions when purchasing or refinancing commercial real estate.
Get commercial real estate and investing news delivered to your smart phone, tablet and desktop, join our email list.