Commercial Lending and the Need for Speed
Aug 23, 2017
You never know when opportunity will knock. In commercial real estate, when opportunity knocks, it won’t wait long for an answer. Success in commercial real estate is as much about timing as anything else; investment properties may be available for years, months, weeks, or less than a day.
More often than not, the best real estate opportunities for commercial real estate investors also have the shortest windows of opportunity. As experienced brokers and investors could tell you, this makes the borrowing process tricky – to say the least. Commercial real estate has a need for speed that traditional lenders can’t always provide, so let’s take a moment to understand why, then explore some situations in which a commercial borrower might benefit from choosing alternative, asset-based financing for their commercial loan.
Why Do Commercial Loans Take So Long?
Securing commercial funding can be a long process, and one that doesn’t always suit the needs of every real estate opportunity. So what takes place during the commercial loan funding process with a traditional lender?
The short answer: a lot.
Whether they’re dealing in a small personal loan of a few hundred dollars, or a large commercial loan of a few million, banks are always trying to balance risk. They need to protect themselves and their funds – so lenders have developed a host of ways to ensure anything they lend will be paid back.
This translates to a thorough review of the borrower, the property, and anything associated with the loan, which require different pieces of information and different review timelines for each. Like with any loan, a bank will want to make sure the borrower is reliable and makes payments. However, they’ll also want to check other financials related to the borrower and the property, revenue, and tenants. Other reviews (such as appraisals) are focused on the property and help the bank determine its lending limits.
Getting all these pieces together takes a long time and a lot of effort on behalf of both the bank and the borrower, and it doesn’t happen quickly. Commercial real estate investors can expect this process to take anywhere from 1-3 months or longer.
In that time, your deal-of-a-lifetime property has slipped through your fingers.
Who Has the Need for Speed?
The list of situations in which commercial property buyers might prefer a commercial hard money loan is longer than we can tackle here, but let’s look at a few hypothetical borrowers who might benefit from a faster funding process.
1. The Pocket Listing
Our borrower, Patrick, is the owner of a small real estate management company and learns of a pocket listing, a multifamily apartment building in his area. Pocket listings are true to their name, and can be hard to come by. Since the seller’s broker holds a signed listing agreement, these commercial properties aren’t widely advertised and remains off the MLS (multiple listing system). Since Patrick has learned about the listing, he’s got an advantage when it comes to that property over a lot of other buyers, but not everyone.
He’ll want to come prepared, and demonstrating that he can receive funding fast is going to be attractive to the broker who has the pocket listing and would like to move the property and make money for themselves and their client. Rather than starting the lengthy process of taking out a commercial loan from a bank, Patrick instead opts for an express commercial loan. He demonstrates to the broker that he can have funding—and the broker and their client can receive their payment—within a few days to a week.
2. A Competitive Property
Our borrower, Diane, is a commercial real estate investor who sees a new listing for a three-unit investment property. It’s currently vacant, in need of significant work, and has a lot of potential. After spending some time researching the property, she determines it will take approximately three months to repair. However, Diane isn’t the only investor who sees the potential in this listing.
Diane needs a speedy close and something that will help her stand out among the crowd. Rather than taking her fix-and-flip potential to a traditional lender, she instead pursues a hard money loan to receive her funding quickly. While the interest rates are higher than with a bank, Diane’s already crunched the numbers – by pursuing a hard money loan, she’ll still be able to turn a significant profit, and she won’t lose out on the opportunity.
3. Foreclosure on the Horizon
Our final borrower, Rick, has been making payments on a commercial mortgage on a strip mall, and the balloon payment is coming due. Since the property has had some recent tenant turnover, he’s worried about making his final payment and maintaining some cash in reserves. Rick discusses his situation with his financial advisor, as well as other professionals on his team, and determines the best option to avoid commercial property foreclosure is a bridge loan.
As the balloon payment date is looming, Rick wants to ensure he has the funding quickly. Rather than restructuring his current mortgage with the lending bank, he instead opts for a commercial hard money loan which is based on the value of the strip mall. By taking this route, Rick will avoid foreclosure in the near term and give him more time to get his occupancy up.
When Time Is of the Essence
It is often that element of time constraint that leads businesses away from their usual sources of capital even if they have extremely solid credit reports on the books. Good deals are virtually always time sensitive, and many firms have used direct business lenders to obtain instant financing and then gone back to their own bank for long-term financing afterwards.
The need is always for speed and traditional money sources can take too long to run things past their oversight committees. If you determine with your advisor and team that time is of the essence with your commercial real estate opportunity, there are lenders ready to help.
This article was originally posted on January 1, 2016 and updated on August 23, 2017.