Did you ever wonder who all the lenders are behind office towers, apartment complexes, and industrial parks? There’s actually a lot of different types of entities that make loans against commercial real estate assets. Here are 4 main types of commercial real estate lenders.
Banks are the most common types of lenders in commercial real estate. They have low-cost pools of capital from their deposit base and can lend on a wide array of project scenarios. You will find banks specializing in construction loans or those who prefer stabilized assets, but there is one for every type! Banks may be knowledgeable about lending based on multi-family projects (apartment buildings) or retail stores, etc., so you’ll indeed find what you are looking for at any bank near you.
When looking for a real estate fund, one key distinction is geography. Many local or regional banks will only be an option in their own geographic area, and national brand banks may lend anywhere as long as the borrower fits their other criteria.
Life Insurance Companies
Life insurance is a multi-billion dollar industry. Insurance companies try to increase their profits by investing in commercial real estate, which can be an economical and predictable way for them to create long-term cash piles they need with a given return on investment, like 10-30 year mortgages.
Bond Market (CMBS)
Commercial mortgage-backed securities are bonds tied to pieces of commercial real estate loans. They come from CMBS lenders who lend against commercial properties and then cut them up into pieces to be sold to investors. Bond buyers can choose their relative risk and return based on the fact that CMBS issuers distribute them stacked in “tranches”—meaning that there are available pieces of the top that are most protected if something unfavorable happens with a property’s financials (like bankruptcy). At the same time, those on the bottom offer a higher gross return but carry more risks as well like foreclosures or vacancies.”
A vital piece of the CMBS market is that new securitizations are rated and monitored by independent rating agencies, which gives bond-buyers objective information about their investments. That way, they can know what to expect with this type of investment without being misled or misinformed. The loans in these projects typically have a long duration for more stability and cater to borrowers who want a stable borrowing scenario over the life of their project.
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The debt fund has been a popular option for construction loans as the risk is higher but can yield more. The direct lending and buying strategy make it profitable when the market becomes volatile. It’s also an attractive investment in other developers’ projects because they have underwriting expertise that few others possess – making them valuable to companies who typically develop real estate or lend against their properties.