Alternative Lenders Differentiate for Success

By Elliot Shirwo, BridgeCore Capital

The real estate banking, lending and opportunity landscapes are changing rapidly, as new alternatives for investment success become available. Once the dominant providers of property loans, traditional banks have lost market share as a result of tightened federal regulations, stricter internal criteria and the emergence of alternative lenders.

Enter the non-bank lender…today providing commercial property investors with conservative alternatives, along with faster approval processes, limited bureaucracy, fewer restrictions and more options when it comes to structure.

As a result of the Great Recession, both the federal government and the banking industry implemented even stricter lending guidelines, including in 2015, the High-Volatility Commercial Real Estate proposal from the Basel Committee on Banking Supervision, that was approved in the U.S. by the bank regulatory agencies. The regulation made qualifying for a commercial real estate loan more challenging for commercial property investors, prompting banks to further tighten their lending criteria and portfolios. While the extensive measures taken by banks to mitigate risk provide benefits to banks in the form of reduced exposure—and to the investor through lower rates—it can also manifest as an opportunity cost for the investor.

Alternative lenders have evolved to fill the gap and return broader financing opportunities to the market.

Since non-traditional lenders are not subject to the same regulatory constraints as banks, they are able to provide greater flexibility in their structure choices, while qualifying borrowers and closing loans more efficiently. Borrowers turning to non-traditional loans, however, will find that many private lenders compete with similar offerings, making it a challenge to distinguish between loan programs or see a clear benefit from one loan product to the next.

To stand out, some alternative lenders are finding new ways to market and structure specific products, often adopting technology and operational efficiencies that dramatically decrease the time needed to close a loan. A pay rate structured bridge loan, or “Pay Rate Protection” loan, is just that kind of innovative approach to private lending, providing a differentiating opportunity to the experienced and sophisticated sponsor who prefers to optimize cash flow.

WHAT IS A PAY RATE STRUCTURED BRIDGE LOAN AND HOW IS IT UNIQUE TO THE REAL ESTATE INDUSTRY?

 The pay rate structured bridge loan defers a portion of the interest until loan maturity or payoff—whichever occurs first. The structure is advantageous to borrowers in that it allows for a lower payment during the term of the loan. In addition, at loan pay-off or maturity, the borrower pays deferred and accrued interest that has not been compounded. The interest rate is uniquely priced similarly to a bank loan during the loan term, but borrowers can close more quickly and easily given the execution capabilities of a private lender.

While traditional loans haven’t changed much, the lending and opportunity landscape has. Waiting for bank approvals can be costly in terms of opportunities and potential profits. When time is of the essence, and when other factors may affect a borrower’s eligibility to secure a compelling financing solution through traditional means, a pay rate structured bridge loan is worth considering. It will embolden borrowers to move quickly when presented with an attractive opportunity, as well as optimize cash flow during the loan term—a valuable combination for differentiating success.

For comments, questions or concerns, please contact Dennis Kaiser