The Rise of Non-Traditional Lenders

The last decade has witnessed an evolution in financing for real estate investors. The main players in the silent revolution include private lenders, who often operate away from the limelight. Their prominence in the financial revolutions was largely catapulted by The Great Recession.

The biggest challenge for investors after the economic downturn was the new, strict regulations adopted by traditional lending institutions. This included regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S., and regulations affecting global banking such as the Basel III accords and industry regulations.

The effect is that today banks do not have as much money to invest in commercial real estate, fuelling the rise of a new marketplace. Alternative funding provides new funding for commercial mortgage brokers.

New Institutions

The changes in commercial real estate come from the fact that traditional financial institutions new opportunities to invest their money. These individuals work non-bank lenders who make decisions on the disbursement of the funds. The lenders pool together resources, which can run into billions of dollars.

These private lenders do not face the same risk-taking limitations as banks, giving them access to diverse opportunities. Additionally, the funds come from multiple sources, limiting the financial risk to an individual.

The revolution has its limitations. Private lending faced reputational hiccups in its early years when dishonest lenders charged upfront fees and disappeared or denied the loan on “due-diligence”. Borrowers are also under the impression that paying due diligence fees guarantees them a loan. Such fees are equivalent to appraisal fees and are required for valuation.

Many borrowers today are still holding on to past norms where they did not have to pay any fees to access loans. This was possible due to bank requirements such as opening an account for the project that would generate long-term business for the bank and insurance from the Federal Deposit Insurance Corp. In worst-case scenarios, the government would bail out the bank.

Available Options

Brokers have a chance at getting a client on board if they present the best financing option first. If both parties have all the information at hand, the process can kick off immediately. In the case of eventualities, the broker should have backup financing options for the borrower. The presentation should take place before the meeting with the lender to limit obstacles for the borrowers as they progress through the lending process.  

The new generations of non-bank lenders have all types of loans, services, arrangements, and combinations— similar to banks. They also offer a higher loan-to-cost financing option of 90 percent or higher. Most lenders also require very little cash outlays, while also guarantying borrowers property ownership.

Commercial real estate deals can access a limitless number of financing options, including well presented venture-capital projects. As financing from non-traditional lenders increases, alternative lending is becoming more permanent in the market especially for real estate investments.