Commercial Mortgage Loans – What Rates Do Hedge Funds Charge For Commercial Mortgages?

The current credit crisis has made it much more difficult for investors to qualify for a commercial mortgage financed by institutions (bank, broker, insurance company). Underwriting standards have become significantly stricter and loan parameters have tightened. Very few transactions are accepted by banks, and even fewer are concluded.
 
Many good loans that should be funded are rejected out of hand. We call this situation the “funding gap”.
 
Recently, many hedge funds and private equity firms have recognized that there are opportunities for companies that can help bridge the funding gap by offering private commercial mortgages to quality borrowers who have been shut out by their banks. Over the past 18 months, fund managers have committed hundreds of millions of dollars to the commercial real estate finance industry. They buy distressed mortgage paper directly from distressed lenders and they are very willing to take out new loans on commercial properties and development projects.
 
But before commercial real estate investors apply for a loan from a hedge fund or other private lender, there are some important things they should know.
 
Private commercial mortgage lenders are opportunistic investors; a hedge fund is in business to generate high returns for its investors quickly and efficiently. The loans they offer will be short-term in nature (rarely more than 36 months) and will carry significantly higher interest rates and origination points than a Wall Street bank or broker. Additionally, hedge funds will be very aggressive in foreclosure situations; they will take your property if you fail.
 
The funds and private lenders we work with currently charge an annual interest of 10%-15% with 3-4 points. This means that borrowers can expect to pay an APR of 13% to 19%. In addition to this, borrowers are responsible for the cost of any third party reports that may be required, such as appraisals, environmental assessments and feasibility reports.
 
On the plus side, there is capital available for these private commercial mortgages and deals can close very quickly. Most funds prefer commercial properties that produce income and are owned by investors, such as apartment complexes, office buildings, or self-storage facilities. They will typically lend up to 65% of a property’s value and underwriting is equity based, not credit based. They will lend for both purchase and refinance, but private loans are “bridge” loans and a viable and realistic exit strategy must be in place. In other words, they will need to know exactly how they will be reimbursed.
 
This credit crunch has been devastating for the commercial real estate sector and the problems are not going away. As we all wait for the situation to improve, private lenders, including Wall Street hedge funds and private equity firms, have cash and are ready to lend it.