Non institutional lenders are taking the center stage

The last decade has witnessed an evolution in real estate investor financing. Private lenders often operate behind the scenes and are among the leading players in the silent revolution. The Great Recession largely catapulted their prominence in financial circles.

Following the economic downturn, the biggest challenge for investors was the imposition of new, stricter regulations by traditional lending institutions. These included rules such as the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as global banking regulations, including the Basel III accords and industry regulations.

As a result, today banks have less capital to invest in commercial real estate, fueling the rise of a new marketplace. Alternative funding provides new funding for commercial mortgage brokers.

New Institutions

Changes in commercial real estate result from new investment opportunities for traditional financial institutions. These individuals work with non-bank lenders who determine how funds are disbursed. The lenders pool their resources, which can amount to billions of dollars.

These private lenders do not face the same risk-taking limitations as banks, allowing them to access a diverse range of opportunities. The funds come from multiple sources, thereby limiting an individual's financial risk.

The revolution has its limitations. In its early years, private lending faced reputational challenges when dishonest lenders charged upfront fees and either disappeared or denied the loan due to inadequate "due diligence." Borrowers also feel that paying due diligence fees guarantees them a loan. Such fees are equivalent to appraisal fees and are required for valuation.

Many borrowers today still follow outdated practices, expecting to access loans without paying any fees. This was previously possible because banks required borrowers to open accounts, creating long-term business relationships and providing insurance through the Federal Deposit Insurance Corporation (FDIC). In the worst-case scenarios, the government would step in to bail out the banks.

Available Options

Brokers can successfully onboard clients by first presenting the best available financing options. The process can begin immediately if both parties have all the necessary information. To prepare for any unexpected issues, the broker should have backup financing options ready for the borrower. It’s advisable to present these options before meeting with the lender to minimize any obstacles that borrowers may encounter throughout the lending process.

The new generation of non-bank lenders offers a wide range of loans, services, arrangements, and combinations that are similar to those of traditional banks. They offer a 90% loan-to-cost financing option and typically require minimal cash outlays, ensuring borrowers retain ownership of their property.

Commercial real estate deals can access a range of financing options, including venture capital. As financing from non-traditional lenders increases, alternative lending is becoming an increasingly permanent fixture in the market, particularly for real estate investments.