Scotsman Guide - May 2009 Commercial Edition

Private Lenders Are an Option for Developers
Commercial property-developers can still find funding for their projects, and brokers can help
By Milton Franklin, president and CEO, Nationwide Business Consultants of South Florida Inc.

Despite market and lending changes, commercial real estate projects can still be financed. And commercial mortgage brokers can position themselves as their clients’ primary source of information about industry changes. They can function as guides for their clients, educating them and leading them through the maze of funding sources.

Previously, traditional banks financed most development projects, and they worked within well-defined, uniform parameters.

Now that banks are less involved in commercial funding, however, many developers are seeking alternative financing sources for their projects. They are discovering that the new rules in place are considerably more varied — and sometimes more flexible — than the rigid structures to which they were accustomed. Sometimes,

this flexibility favors the lenders, but borrowers also can benefit.

In fact, developers often will find that they now must turn to private lenders to fund their projects. Individual lenders subscribe to their own internal rules, based on investors’ needs. Brokers who understand the private-lending world can advise their clients on the varying rules and help fund their clients’ projects.

individual investors to create pools or as funds for lending. They may also acquire funds from large or small institutions, each of which may have specific guidelines for

or committee reviews the projects. This group may have established a process whereby there must be a unanimous decision, or they may accept the findings of a majority. Either way, the lender’s board makes a decision to fund or decline to fund the project.

Here is where the new rules sometimes cause friction, especially among developers. Based on their perceptions of the market, they may feel strongly that their project has merit. The lender’s board, however, may feel it cannot justify the financial risk and will pass on

the project. This leaves developers feeling that they have not been treated fairly or that the lender’s decision is wrong.

With private money, however, brokers and their clients must understand that the rules are also developed privately. This is an unavoidable outcome of the informal shifting of commercial financing responsibilities from regulated national corporations to significantly smaller, unregulated organizational

“Developers often will find that they
now must turn to private lenders to
fund their projects. Individual lenders
subscribe to their own internal
rules, based on investors’ needs.”

Lending’s new rules Federal and state regulations do not exist to create uniform operating procedures for private lenders, as there are in the formal commercial banking industry. Private lenders may use money from

Milton Franklin is president and CEO of Nationwide Business Consultants of South Florida Inc., which maintains direct relationships with all types of nontraditional funding sources and tax-incentive consultants. Nationwide offers a full range of creative financing products and services to commercial clients, in addition to partnering opportunities for commercial mortgage brokers and project funders. A graduate of Wharton Business School, Franklin has 25 years’ experience in financial services. Reach him at (786) 506-3578 or miltonfranklin@gmail.com.

lending their funds or for required investment returns. Regardless of the funding source, private lenders must satisfy their investors’ demands to continue to lend and to stay in business.

Final funding decisions can follow general guidelines by providing stipulations and limitations to which each project must adhere, mimicking banks’ decisionmaking process. In many cases, after the due-diligence process is complete, a board