Things To Look For In Private Lenders To Ensure Your Deals Get Funded

Looking for a Private Lender? Some Things to Think About

Banks continue to stand on the lending sidelines as uncertain economic factors and rising interest rates continue to weigh on the banking industry. Increasingly, private lenders have become the go-to lender to get deals across the finish line. However, a challenge with private money lenders is that reliable and trusted sources can be difficult to find.

Let’s start with some key takeaways.

As an investor, important steps must be taken to find and vet a good private money lender include asking for referrals, creating a pitchbook of the intended deal, and reviewing past transactions a private lender has funded.

Where do I find a qualified private lender?

So how does one find a good private lender? Private lending is based more on relationships compared to larger banks or even a local credit union. Once a private lender knows they’ll be repaid on time and can trust a borrower, the greater the odds are of obtaining funding for future deals.. In general, private lenders usually get business through word-of-mouth versus advertising to the general public, thus they can be a little more difficult to find, but also well worth the time and effort.

Besides the slowdown in lending by banks, other reasons why an investor might seek private money lending include qualification, which is easier for a borrower since private lenders focus more on the specifics of a transaction and less on a borrower’s credit score. The process of funding is faster and requires less paperwork because private lenders fund and hold private money loans in-house. Cash deals may put an investor’s offer ahead of a buyer with a financing contingency and a private lender can fund multiple transactions at the same time, helping to bypass the loan limits that traditional lenders may place on real estate investors.

Make sure you vet the lender

While the field of private lenders is growing, it’s important to understand that not all private lenders are a good match for the borrower. Here are some suggestions you might follow when you begin your search:

Newport Capital has emerged as a valuable source in the private lending market. Established in 2012, Newport Capital executives have decades of commercial real estate experience, including fund management, property acquisition, management, and disposition. We are an established operating platform that efficiently originates funds and services real estate private credit. With all operations and investment approvals handled in-house, the company prides itself on making decisions in a timely manner and upholding the terms and timeframes to which it commits. In addition to its broad industry knowledge, Newport Capital has established relationships and networks in private credit financing. Our niche expertise is invaluable to borrowers in providing support and guidance. Newport’s relationship-driven approach to lending can help connect borrowers with strategic advisory services to support their growth. If you would like more information, click here: Real Estate Private Credit - Newport Capital.

Don’t Let the Banks Stall Your CRE Loan 

In these days of bank failures and the current pull-back from the banking industry in CRE loans, just how does one move a deal forward if your bank is no longer lending? According to the Mortgage Banking Association, there is about $4.5 trillion of CRE debt that is currently outstanding, yet only about $1.7 trillion of that amount is held by banks. The remaining $2.8 trillion is owned by lenders. Those lenders include life insurance companies, Government Sponsored Enterprises (GSEs) --Freddie Mac or Fannie Mae-- mortgage REITs, and private debt funds. Additionally, some of these funds are held as securitized commercial debt such as Commercial Mortgage Backed Securities (CMBS) or Collateralized Loan Obligations (CLOs). In addition, nonbanks account for a greater share of lending for most asset classes, with the largest nonbank share at 70% coming from multifamily lending. This large nonbank lender share is due to the presence of the GSEs in residential real estate markets, as they regularly purchase and hold residential mortgages originated by other lenders, including mortgages for apartment buildings. And to get a fuller appreciation of the nonbank lender, office property loans comprise approximately 17%, or $750 billion of the $4.5 trillion in total CRE debt. About 45% of these office loans are held by banks, with the remaining 55% held by nonbanks.

Banks are not the only game in town

The banking industry has cut back on lending for commercial real estate over a variety of concerns such as economic uncertainty or rising interest rates. In addition, the ongoing growth of e-commerce has reduced the demand for physical retail space while the pandemic nearly gutted the hospitality sector. Such shifts have forced lenders to become more strategic and selective in their lending practices.

So, if banks aren’t lending in CRE, what are the options? One option is to look for alternative lenders such as private equity firms, hedge funds, or other nonbank lenders. Another option is to consider seller financing or joint ventures with other investors. You can also try to negotiate with the bank to see if they can offer more favorable terms or find a co-signer for the loan. It’s important to keep in mind that each situation is unique and requires careful consideration of all available options.

As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Program are actively involved in providing CRE loans. But remember, like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers.

Things to Consider                                                     

For lenders, the key ingredients when considering a loan include the nature of the collateral,  the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans. CRE loans tend to be more expensive than residential loans. Down payments typically range from 20% to 30% of the purchase price. Interest rates also tend to be steeper: around 10% to 20% for most borrowers. Loans backed by the Small Business Administration (SBA), are linked to the prime, Treasury, or other base rate, with maximum rates set at a specific amount above that base. Depending on the loan program, interest rates may be fixed or variable, and rates may be negotiated by the lender and the borrower or set by the SBA. The SBA 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The interest rates for this program are 7% - 9.5% for variable rates and 9.75% - 12.75% for fixed rates.

And Finally Nonbank lenders make up a substantial portion of the CRE lending market. While the bank side of this market has attracted the most attention, more than half of all CRE mortgages outstanding are held by nonbank lenders. In the wake of the recent bank failures, many are expecting greater regulatory scrutiny for banks of all sizes. In today’s tight credit market, some nonbank lenders, especially those with higher risk tolerances, may be able to provide liquidity as traditional banks pull back from CRE lending. At Newport Capital we aren’t like the rest. With a primary focus on value-add and opportunistic projects, Newport Capital has the capacity to deliver funding solutions across the capital structure. We stand out from the pack in that we don’t require 3-5 years of financial statements or income tax returns. We loan up to 90% of cost or 70% of stabilized ARV and our rates are 9-15%. We are known for our quick closing and can close in less than 21 days. We welcome the hard to fund transactions that traditional banks won’t touch. See what we can do for you here:

CRE Private Credit: Mind the Opportunity Cap

As featured in WMRE 2023 Market Outlook

As economic uncertainty and rapidly rising interest rates drive investor apathy and traditional lenders further rein in their activity, private credit continues to be an increasingly attractive frontier. In fact, McKinsey research found that direct lending accounts for 73 percent of the overall growth in private debt fundraising over the past decade.

Yet rather than being worried about competition, savvy investment managers recognize that inefficiencies within the private credit sector are abundant—specifically as it relates to senior mortgages for middle-market commercial real estate (CRE).

New CRE mortgage originations have averaged $530 billion per year since 2015, bringing the level of outstanding commercial and multifamily debt to a record $4.4 trillion by midyear 2022, according to the Mortgage Bankers Association.

While banks, agencies, CMBS and life insurance companies account for over 85 percent of the real estate debt space, private lenders are gaining market share, with more than $520 billion in outstanding mortgages. Assuming a quarter of those loans roll over each year, it represents a $100-billion-plus opportunity for alternative lenders.

Several larger, institutional-type private players have also raised billions for private debt funds recently. These vehicles—whose investment thresholds are often high and prohibitive for smaller investors—account for 27 percent of the $108 billion raised for CRE during the first nine months of 2022. Due to the scale of capital deployment required, these funds typically compete within the same shallow pool of class-A properties in top-tier markets.

That leaves a huge gap in capital availability for a large segment of CRE: the small- to middle-market. Thanks to increased regulations, traditional lenders now account for just 11 percent of sponsored middle-market financings, down from nearly 70 percent in 2013. This is the sweet spot for private credit providers and investors who can take advantage of market dislocation.

CRE debt funds in general go a long way in diversifying broader investment portfolios; their scale alleviates single-asset risk exposure by distributing capital across a pool of loans and they have more accretive return profiles compared to broader fixed-income asset classes.

Private credit also has a low correlation with the equity markets and is structured to achieve a fixed rate of return, predictable cash flows and a yield premium relative to fixed-income alternatives. Investors with varying appetites for risk can move up and down the capital stack; returns typically range between 5 percent and 8 percent at the lower-risk end of the spectrum and can reach low- to mid-teens, depending on deal structure.

As small- to middle-market CRE debt investment grows and matures, there will be ample opportunities for individual investors to achieve consistent, stable yield. For those looking to invest in the space, it’s crucial to choose the right manager with which to place your capital.

The strongest direct lenders in the market will have a team with comprehensive industry knowledge and connections, access to discretionary capital and a fully integrated real estate platform to oversee the life of their loans. Furthermore, managers with cohesive debt and equity capabilities will have a broader relationship base, a better understanding of pricing inefficiencies and consistent borrower demand from which to cherry-pick opportunities.

When aligned with the right investment manager, real estate private credit marries the attractive features of both debt and equity: stable, downside protection with consistent cash flow on the credit side, backed by equitylike returns and a direct inflation hedge tied to real estate ownership. The dearth of capital providers focused on the middle-market space provides a meaningful opportunity for investors and asset managers looking to capture market inefficiencies in scale.