Someone asked me a question the other day about how I start to qualify a borrower for a commercial loan. This got me thinking about the different types and qualities of lenders and how they evaluate a borrower’s loan request. I usually start by seeing if the borrower fits the least expensive/highest quality lender, often called “A” paper, and then work my way down. Today’s article is a primer on the different types of commercial mortgage lenders.
CRE Mortgage Lender Mix
To give you a quick survey of the current lender mix, Globe Street recently published a snapshot:
- Banks accounted for 24.3% of total loan volume in Q2 2021
- Construction loans accounted for 46% of bank lending
- Regional and community banks were the most active
- CMBS lenders originated 14.3% of commercial mortgages in Q2 2021, up from 11% in Q1 2021
- CMBS issuance totaled $45.7 billion year-to-date through June, up from $30 billion for the same period a year ago
- The single-asset, single-borrower (SASB) market has been particularly active
- Life companies accounted for 22.7% of commercial mortgage originations in Q2 2021
- they issued competitive quotes on fixed and selective floating-rate multifamily mortgages
If you’re doing your math here, that puts the “top tier” lenders at about 61% of all commercial mortgages. The rest of the lender mix consists of smaller institutional lenders (e.g. credit unions) and private, non-bank sources.
To give you some further perspective on the size of the market, according to RISMEDIA:
Commercial and multifamily mortgage bankers are expected to close $578 billion of loans backed by income-producing properties in 2021, a 31% increase from 2020’s volume of $442 billion, according to a new forecast released by the Mortgage Bankers Association (MBA).
Now for some definitions:
Commercial Banks: Commercial banks remain one of the leading sources for commercial mortgage loans. These banks typically like good quality, cash-flowing properties in good urban and suburban locations. Most commercial banks make short and intermediate terms loans of three to seven years, and look for larger loans of at least $1 million. They are usually “A” paper lenders.
Local & Community Banks: Local banks are a good source for smaller loans and loans in non-prime locations. Local banks usually tend to lend in their local market to local borrowers. Local banks will expect a personal guarantee from the borrower and will usually look for a deposit relationship as well.
Agency Lenders: Fannie Mae and Freddie Mac are actively engaged in apartment building and multifamily lending for qualifying properties and strong borrowers. Other “Agency” loans include HUD/FHA. These can cover new construction as well as existing properties. Borrowers seeking agency loans should have excellent credit, personal net worth, liquidity and experience. An existing property should be in good condition, with a solid rental history. Properties with high turnover, vacancy or deferred maintenance will not qualify. Agency lenders are a great choice for apartment loans of at least $1 million.
Conduit Lenders: Also called “Commercial Mortgage-Backed Securities,” CMBS loans are made by Wall Street investment banking firms. These loans are pooled together and securities are issues and sold to bond buyers. The bond buyers provide liquidity and allow the issuers to make additional loans. CMBS lenders want larger loans of at least $3 million. These loans are usually written for 10 years and are non-recourse. From the borrower’s perspective, this is a good type of loan for a fully-stabilized property that the owner/investor intends to hold long-term
Insurance Companies: Life companies offer long-term insurance policies and need to match funds by issuing long-term commercial mortgage loans. Insurance companies have historically provided low rate and long-term loans on commercial real estate as part of their investment portfolios. These loans are underwritten conservatively (low loan to value ratios) and are offered on strong properties and to strong borrowers. Insurance company rates do not fluctuate with each and every move in the market as these loans are tied to the company’s internal cost of funds.
Credit Unions: Credit unions have always lent to residential homebuyers. Now, many credit unions are starting to actively lend on commercial real estate, as well. These lenders typically like deals close to home and like to establish relationships (they like deposits). They most often compete with the local and community banks in the area. Most credit unions will expect recourse from their borrowers, and many will require that the borrower become a credit union member.
Private Lenders: For borrowers who do not qualify for traditional financing from the other sources, there are many private, or non-bank lenders, from which to choose. These loans are usually short-term and at rates considerably higher than conventional rates. These loans require less underwriting time and usually close in under 30 days. Private lenders are more concerned with property value and potential cash flow than with borrower credit issues. For borrowers with credit or income problems, or those needing a faster timeline to closing, a private lender might be a good choice.
Your Concierge Service
Rather than trying to navigate the challenging and often confusing world of commercial mortgages, SOFIA Capital Ventures offers borrowers and builders a “Concierge” service. We provide a no-cost evaluation of any loan request and can match you to the best lenders we know who have an “appetite” for your type of loan scenario. We also work with SBA lenders (both bank and non-bank) to offer you the widest range of loan choices to meet your requirements. CONTACT US for your free loan evaluation.