"Commercial Banker Discusses Typical Loan Scenarios
for Private Money Deals"
Commercial real estate, private money
loans also known as hard money and or bridge loans are becoming
more prevalent as borrowers enjoy less red tape, quicker
closings and more “common sense” underwriting than conventional
financing provides. Typically though, borrowers still relay
on this type of financing as an option when conventional
sources are not available.
The increased speed and flexible underwriting
comes at a steep price with interest only rates often in
the teens, 3- 6 points being the norm and loan terms being
relatively short at 12 – 36 months.
Why would owners pay such high fees/rates?
In short, because it makes sense for them based on their
current situation. Below are examples of transactions where
it made sense for our borrowers or go the hard money route.
Grand Rapids. Small office building that
was previously used as the owners business headquarters.
The owner wanted to move his business out and convert the
property into a multi-tenant building (investment property).
To accomplish this he needed to create common areas, alter
the entrance and add an elevator to the property. He needed
a substantial amount of cash to make these improvements
happen.
The problem was four fold: Personal credit
was in the 400’s, the owner had virtually no liquidity,
the owner had no development experience and the year to
date, profit & loss and balance sheet showed that his
business was losing money. These issues eliminated any type
of conventional financing.
The owner knew that the property would
be a cash cow, and drastically improve his overall financial
position, if he could get the money needed to complete the
project. For the lender the deal made sense as well, due
primarily to the low loan to value (High equity).
In addition, the exit strategy was simple,
after the building was renovated and leased out, the property
would stand on its own and qualify for conventional finance
base off the new cash flow.
Metro Detroit. Local business that owned
six retail buildings and had its loan “called” (forced balloon)
prematurely by its bank. The loan was called primarily because
the business had lost money for three years in a row. The
bank was nervous the borrower would go out of business.
The business was forced to seek alternative financing.
Besides the above, multiple conflicting
partners further complicated the matter and made conventional
financing that much more difficult to obtain.
However, the properties where in solid
condition and had much equity. The borrowers where able
to leverage the equity and refinance their existing mortgage
and roll in other business debt into the private money loan.
The result was increased cash flow enabling
the business to regain profitability – even though their
rate was much higher than the previous mortgage.
Cleveland. A real estate investor was
in the process of purchasing a 40,000 square foot mixed
use building. The seller became frustrated and began to
doubt the buyer’s ability to purchase the building as the
conventional lender became cautious and dragged the process
out. To the buyers shock, the lender pulled out, two weeks
before the scheduled close.
The primary issue for the conventional
lender was that although the current net operating income
could support the proposed loan, the historical (average
of the last 3 years) net operating income could not meet
the traditional banks Debt Coverage Ratio’s.
The buyer, fearing that he would lose
the property and money he had already put into the deal,
used private money to meet the closing schedule. The exit
strategy to pay off the private money loan was to simply
continue to document the current net operating income and
refinance the debt into a conventional loan one year out.
These are typically private money scenarios,
others include foreclosures, distressed properties, recent
bankruptcies, lack of existing cash flow, partnership buy
outs, land contract refinances, “need for speed,”etc.
Common positive traits that make the loans
financeable include loan to values less than 60% and clear
“exit strategies” on how the borrower is going to pay back
the private money lender.
Yes, hard money is expensive, but can
be a viable option given the right (Or wrong) set of circumstances.
About The Author
Jeff Rauth is President of Commercial
Finance Advisors, Inc. based out of Bloomfield Hills, MI.
He specializes in Commercial Real Estate Loans between $100,000
- $5,000,000. Offers unique loan programs such as Commercial
30 Year Fixed, private money loans and 90% non SBA financing.
He can be reached at 248 990-7602. jrauth@cfa-commercial.com.
www.cfa-commercial.com.
Article Source: Article
City
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