3 Funding Sources Still Standing
Small Business Administration, portfolio and hard-money lenders could be worth your while
By Jeff Rauth, president, Commercial Finance Advisors
Commercial lending has
seen an influx of brokers of late,
especially from the belittled residential sector. But the commercial real
estate market is not necessarily in a better
position than residential.
Underwriting has tightened across
the board. Major players on the commercial secondary market are losing their liquidity and have slowed their lending to
a crawl.
As a result, commercial mortgage brokers are forced to work with the players
that are still funding deals. U.S. Small
Business Administration (SBA) lenders,
portfolio lenders — those that lend their
own capital and don’t immediately resell
the loans on the secondary market — and
commercial hard-money lenders are the
major sources.
These three sources are still lending
and are not directly tied to the woes of the
secondary markets. Some SBA sources do
sell their debt off on the secondary market.
But the bulk of the loan balance is guaranteed by the U.S. government, which makes
it easier for the funding bank to hold the
debt, if necessary.
Let’s start with SBA-approved lenders,
which can be a solid source for deals for
business-owner clients. Loan programs
such as the 7(a) and 504 offer financing for
property acquisition or construction, as
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well as for long-term capital needs. A significant drawback to SBA loans, however,
is that brokers are not allowed to be paid
points on the settlement statement. It’s a
violation of SBA rules. Instead, the broker
must be paid a referral fee by the bank or
paid outside of closing. Most SBA lenders
will suggest brokers have a separate agreement with the borrower to get paid outside
of the closing. Brokers should ensure this
legally binding fee agreement is in place
before proceeding with a deal.
Another source of funding in today’s
market is portfolio lenders, typically large
banks or savings and loans that lend from
their own capital and keep the debt in
their portfolio — at least for a while. Also
known as balance-sheet lenders, these
portfolio lenders have many of the same
issues as SBA lenders. In fact, many portfolio lenders use SBA programs to guarantee their loans. Although many traditional
banks are still lending, these institutions
are not necessarily broker-friendly. Nonetheless, these lenders tend to offer longer-term mortgages at typically reasonable
rates. Commercial mortgage brokers will
have to find a portfolio lender that likes the
deal, will let a broker be involved in it and
allow for payment at close.
From a funding point of view, one of
the easier deals to get done is hard money.
These lenders are often individuals who are
lending their own money and making a direct decision. The terms that hard-money
lenders offer often are harsh, however, and
many borrowers simply will not accept
them. Three to 6 points are standard, and
rates of 13 percent to 16 percent often are
what you’ll see. Hard-money deals require
borrowers with a set of circumstances that
makes these terms acceptable. For example, a business-owner losing a substantial
amount of equity because of foreclosure
could look to refinance with a hard-money
loan. Or builders could seek a hard-money
deal if they need immediate capital to keep
from losing an opportunity on another
project. Short time frames are ideal for
hard-money financing.
No corner of the mortgage business
is exempt from the current issues of
the financial markets. But learning how
to work with these three sources could
give commercial brokers a better chance
of succeeding and getting paid for their
hard work.
commercialloans@equityone.com
equityonecommercial.com
ICO
Jeff Rauth is president
of Commercial Finance
Advisors, a commercial
mortgage brokerage based
in Birmingham, Mich. CFA
recently opened a store
for commercial mortgage
brokers at www.cfa-commercial.com. The
company offers training manuals, spread-sheets, fee agreements and more for commercial brokers. Reach Rauth at (248) 885-8797
or jrauth@cfa-commercial.com.
