There are essentially four sources of capital from commercial mortgage lenders.Â Basically all commercial mortgages come from theses sources, which are commercial private money lenders, conduit or CMBS lenders, SBA lenders and portfolio bank/lenders.Â Though these distinctions can be somewhat blurred, for example some national banks pool and sell their loans like CMBS lenders, these four categories are what make up the commercial mortgage market.Â Letâs take a brief look at each individually.
Commercial Mortgage Lenders -Â Private Money
This category is comprised of individuals to private hedge funds that loan their own money secured by commercial real estate.Â These sources also go under the names bridge loans and or commercial hard money.Â There terms are usually short at 12 -24 month, with interest only payments with rates and fees on the high side.Â Borrowers should expect to shell out 3 -6% on the front with rates between 12% – 16%.Â These programs are often used by individuals that have short time frames and or have been turned down by banks.Â
Commercial Mortgage Lenders – Conduit or CMBS Lenders
CMBS or Commercial Mortgage Backed Securities type loans have been getting a lot of press lately as this category has been dragged down by the residential subprime mess.Â Basically this is the Wall Street side of the business where commercial loans are originated and then pooled together in batches often over $100 million and securitized into bonds.Â These bonds are than sold to large investment companies such as insurance firms or pension funds.Â The main benefit for the banks and lenders is the liquidity created by selling the loans off rather than holding onto them.Â By freeing up their capital, they are in the position to reinvest into other commercial mortgages.Â The main benefit for borrowers with these types of loans are many, such as long term fixed rates, longer amortization periods and competitive rates.Â
Lenders and banks that are set up with the SBA boast a few strong advantages over traditional bank loans.Â I.e. 90% financing and longer fixed term rates are 2 examples.Â Itâs important to note that the SBA does not lend its own money but guarantees banks, in case of borrower default, that the bank will receive all or a portion of their money back.Â Think of it as an insurance program for the bank.Â The funding bank or lender are often more aggressive with their terms because of these guarantees.Â Unfortunately SBA loans are only for businesses that occupy their building and not available for investors.Â
Commercial Mortgage Lenders – Portfolio
Portfolio banks or lenders essentially loan their own money which they often receive from deposits.Â This is the most traditional type of banking and was the norm in the past.Â These banks that still operate in this fashion are often smaller local banks that often only cover one or two states.Â They do have some flexibility with their underwriting as they are making much of the decisions to fund on their own.Â However most portfolio lenders are conservative in nature.Â Â Itâs interesting to note that portfolio lenders are experiencing good growth (relative to the whole banking industry) right now as many are in strong positions as they are not dependant on Wall Street for their capital.Â