Why would someone choose private mortgage lender?
Hello everyone,
I am always struggling to understand why would someone go with private mortgage lenders instead of traditional lenders such as banks. Banks (and some insurance companies) usually quote at least 25 bps below private lenders (I have seen a wide range from as low as 25 bps to 100 bps).
The first reason that I can think of is the lending process. It may take up to 3-4 months for banks to process a loan that they have quoted and issued LOI. So it is time benefit for borrowers to go with private lenders. But isn't that in real estate, you should start all the planning, budget, mortgage renewal, etc. in advance? Why would you wait until the last minutes and pay a higher interest rate to the private lender?
I think the second reason is because of the loan structure. Some borrowers would like to borrow up to 75% but I rarely see banks do that. But again I am struggling to understand this because I have seen borrowers go with private lenders with a recourse, 50% LTV, and 1.3 DSC loan.
Kami
You pretty much nailed it. I think there was actually an article in "The Property Report" section of today's WSJ. LTV's much beyond the traditional 75%, non-recourse (although plenty of traditional lenders will do non-recourse), wacky DSCR's, fast closings, etc. Also, if it's say... a private lending arm of a REIT that focuses on retail, and you're a local developer who intends to get rid of the property in a relatively short time frame... you might be able to get an IO mortgage with 90% LTC and the assumption that the REIT will purchase the property within a year or so of completed construction.
But a borrower going with a private lender with a higher rate in a case like you mentioned does seem kind of strange.
Here is the general rundown of how things are TODAY - this constantly changes as rates move, risk appetites shift, etc. This is for institutional / corporate type borrowers, $10mm+ loan size, existing assets (not construction), acquisition loans. This is a gross over-generalization and each program is different.
CMBS - extremely competitive right now. Can offer relatively high LTVs (up to 75%, 70% more typical). DSCR is important. Competitive rates, bench marked off swaps, S+180-300 area feels right to generalize. Generally 5,7 or 10 yr loans; more competitive today on longer terms from what I've seen. Generally fixed rate unless very large loan balance ($200mm+). 30 yr. am with some I/O. Defeasance to prepay (very expensive). Non-recourse. Sponsor quality not incredibly important. Some loan structure (e.g. reserves, lockboxes) but loosening up by the day. Standard closing timeframe. May allow mezz.
Bank Balance Sheet Short Term Floaters - LIBOR-based floaters, e.g. 3 yr term with 2 1-yr extension options. can be VERY cheap - L+150-300. Often come with hedging requirements. Prepayable and offer most flexibility for short-medium term holds. Sponsor quality is important. Typically constrained by debt yield from what I've seen, will vary by asset class but generally 8-9% feels right. This will keep you at lower LTVs (+65%) and DSCRs vs. CMBS. Standard closing timeframe. Generally no mezz.
Private Lender Short Term Floaters - same as above but generally a little more expensive, sponsor quality less important. Higher LTVs are possible but you pay for it. Some programs can tolerate unstabilized assets with proper reserves. Some lenders will compete on closing timeframes, some on proceeds, some on rates. Will allow mezz, many lenders will quote 1st and mezz up to 90% LTV.
Insurance Co. - longer term paper. Blue chip loans. Typically reserved for $50mm+ loan size, strongest borrowers, strong stabilized assets. Lower leverage. Competitive with CMBS on price depending on swap rates. Could be mezz.
Anyway I wrote all this to illustrate that there are MANY factors in choosing a loan and lender type. Your question is too unspecific to really answer directly. Rate, term, proceeds, fixed/float, ability to prepay, closing speed are some, there are others. Not all options will be available to all sponsors / asset types.
Also re: timing - 3-4 months would be an very long time frame to close a loan. A normal purchase contract might allow for 30 days DD plus 30-60 days to close, so any acquisition loan would need to be closed in that timeframe.
Hope that helps a bit.
Everything you wrote seems pretty accurate except the typical size for insurance company loans. There are a ton of life cos. that will do much smaller balance loans than $50MM. I know because I lose to them all the time. Actually sat next to a life co originator at a dinner at the last MBA whose average deal size was $2MM. Spot on in saying that they're typically looking for higher credit quality than the rest of the lending world.
The most surprising thing to me today is how aggressive a lot of the local and regional banks are. Losing plenty of deals these days to banks willing to offer full leverage, non-recourse.
Slopthrop, I believe it, my view is from a borrower's standpoint so not the broadest. To be honest we haven't really done much with insurance cos.
I take it you sit on a CMBS desk?
Correct, at least part of the time.
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