If you’re planning on developing, buying, or improving commercial real estate, there are four main types of CRE lenders that you need to know about: banks, credit unions, private lenders, and agencies.
We’ve made an important distinction between a CRE lender and an investor. CRE lenders approve money to be borrowed (often called debt financing) with the understanding that this money will be slowly paid back over time with interest. This happens on a month-to-month basis, usually, with interest accruing over time. There are even certain tax benefits to paying off interest on debt financing. The 4 types of CRE lenders we listed above will all offer debt financing options.
Investors, on the other hand, lend businesses and individuals money in return for a stake or ownership in a business or venture. This money (often called equity financing) isn’t expected to be paid back, but a portion of your profits will have to be paid to these investors.
Debt financing through a lender is far more common in commercial real estate. We’ll be breaking down the four types, where to find them, and what you need to know about them. In a separate post, we cover the different types of commercial real estate loans.
Banks
Banks are one of the most well-known CRE lenders, as they provide other debt financing options like auto and personal loans. Banks tend to provide financing to individuals, businesses, and developers for the purchase, development, or refinancing of commercial properties.
Some examples of banks that act as CRE lenders are Wells Fargo, Deutsche Bank, and Bank of America.
The advantages of using a bank for debt financing are:
Competitive interest rates
Longer term loans
Fewer restrictions on use in your CRE project
Possible incentives if your business has an account with the bank
The possible disadvantages of banks for commercial property mortgage loans are:
Lengthy approval process involving a lot of interested parties
Legally binding obligations for repayment on your loan
Not feasible for startups with no proven cashflow
For the last point pertaining to startups, it’s generally better to take out a loan approved on a business credit, but this requires that your business has a credit history. If you take out a loan or finance your CRE venture on your personal credit, you’ll be accepting a lot of personal risk for the project. But, this may be the only option, for a startup with no business credit and no cash flow.
Some banks will want you to already have an account with them to borrow money, but this isn’t required for everyone. Usually, this is only if a borrower has a low credit score. Because some banks have incentives for having an existing account, your business should look into credit financing with the bank that it currently uses.
Where can you find banks that offer CRE loans?
Biscred’s commercial real estate database includes contact information for 1,276 banks and 60,302 bankers who specialize in CRE lending.
Credit Unions
Credit unions are similar to banks in the financial services they provide, but are structured a bit differently. Credit unions do provide financing to individuals, businesses, and developers for commercial real estate ventures but won’t have a strictly for-profit goal.
This is because credit unions are not-for-profit financial institutions. They are owned and operated by members and customers, who have a say in the decision of the union’s operation.
Every local city will usually have a credit union. Some examples of larger credit unions are Navy Federal, Alliant, and First Tech.
The advantages of using a credit union for debt financing are:
Lower fees and interest rates
Less for-profit incentives
Favorable terms for members
Easier approval process
The disadvantages of using a credit union as a CRE lender are:
Strict membership requirements based on employment or location
Less technological integration (may not have an app, ATM, or updated website)
Restrictive requirements for a commercial real estate loan; your business goals may not adhere to the credit union’s community goals
Credit unions are still focused on providing benefits to their members, even if they’re not for profit. Because the members have a say in the actions of the business, the decision to grant you a loan may be up to the more arbitrary needs of members rather than the profit-focused decision of a bank.
We’ll also note that you may need to already be a member of the credit union to take out a commercial real estate loan. This means being approved to be a member of the credit union, which can take up time.
Where can you find credit unions that offer CRE loans?
Biscred’s CRE database includes contact information for 284 credit unions and 10,719 professionals who work at credit unions that offer loans to commercial real estate businesses.
Private Lenders
Private lenders exist outside the bank/credit union ecosystem as non-institutional entities that finance your commercial real estate project in return for something, typically interest on the amount borrowed. This can result in more flexible repayment options or even more strict terms. It will all depend on the private lender.
Some examples of private lenders are Thorofare Capital, Bolour, and JDI Realty.
The advantages of using a private lender for debt financing are:
Less strict approval process
Quick approval for loans
Flexible loan structures and repayment schedules
Strict terms and conditions of lending
The disadvantages of using a private lender as a CRE lender are:
Use of your property as collateral
Higher interest rates
May factor in your personal credit or financial history
We’ll emphasize the point that private lenders will secure the loan with the collateral value of the commercial property. That is, if you default on the loan, they may take ownership of your commercial property. That said, if you’re looking for a quick, unique loan structure and don't meet the strict requirements of banks or credit unions, private lenders are worth exploring.
Where can you find private lenders for CRE?
Biscred’s clients have access to more than 2,700 private lending firms and 21,720 individuals in private lending who have asset experience in a variety of categories.
Agencies
An agency in CRE is a financial institution that works with government-sponsored entities (GSEs) like Fannie Mae or Freddie Mac to provide debt financing. Agency lenders facilitate commercial real estate financing through the support of government-sponsored entities. The important distinction is the difference between an agency and our previous section, a private lender.
An agency lender will create loans that adhere to GSE guidelines so that they’re backed by these entities. These agencies may buy and sell the loans on a secondary market, but they’re generally much more stable and secure because they have an implicit government guarantee.
The advantages of using an agency for debt financing are:
More favorable terms and interest rates
Streamlined loan origination and approval process
Focus on projects like multifamily housing (like apartments and town homes)
May be fixed-rate, long-term financing
The disadvantages of using an agency as a CRE lender are:
Strict requirements for commercial real estate projects (may be limited to multifamily housing, for example)
Higher administrative costs make the loan not feasible unless greater than a certain value
Take into account the value of the property you’re purchasing — a low-value property will likely not be approved by an agency
Because of the strict requirements for agencies, and the fact that they focus on using the value of the property as collateral similar to private lenders, this option is the most suitable for multifamily projects like apartment complexes or town homes where the value of the property is already high. This won’t be an option broadly available to all CRE projects.
Where can you find commercial real estate agency lenders?
Biscred’s database currently includes contact information for 197 agency lenders that specialize in commercial real estate, and almost 13,000 professionals who work for agency lenders. You can see from this chart, that the majority of agency lenders have asset experience in multifamily and affordable housing.
Photo 70114799 | Roman Romaniuk | Dreamstime
*The information in this article is for informational and educational purposes only and should not be taken as financial or legal advice. Interest rates for commercial real estate loans are just as sensitive to economic changes as consumer loans are. See “Downloads and Resources” on the Small Business Administration website for the latest CRE rates.
Comments