Current commercial real estate market realities are providing capital investors with an opportunity to realize highly lucrative profit margins while helping borrowers to tap into the cash that they need on a short-term basis. About $410 billion worth of commercial loans are expected to come due in the next 6 to 10 months. Due to declining property values and market forces that make longer-term refinances difficult or impossible to come by, many of these borrowers are faced with the prospect of defaulting on their loans or finding an interim solution that can help them buy the time they need in order to locate a more permanent solution.
Enter real estate private equity.
Private equity injection is a sensible alternative to liquidation or loan defaults, and is an effective vehicle for capital investors seeking a relatively high rate of return for their investments.
One of the primary concerns that conventional lenders have when making commercial real estate loans is what to do in the event that the borrower defaults on their credit obligation. In many cases, there are relatively few options for these lenders when this happens.
Private equity, on the other hand, have more deal structure flexibility not afforded to traditional banks and may allow for setting loan terms to help offset much of their risk. Depending on the situation, some groups are able to set terms stipulating what specific steps can or must take place in the event that certain things take place. For instance, many bridge loan lenders can require borrowers to inject more of their own cash into a deal as a condition of not calling the note.
In addition, other loan stipulations that are often used in order to provide lenders with greater confidence for loans that are in jeopardy of default include repossession, quick asset sales, and giving lenders the ability to take an equity stake in a property instead of demanding immediate repayment in the event that the borrower shows signs of distress or defaulting on the loan.
In order to achieve the desired financial results illustrated in the above examples, it’s very important that investors closely work with a commercial mortgage broker or loan sponsor with a documented track record of successful deals in the past. While there are a number of newcomers to the industry who have no record to speak of, it’s critical that the firm selected for these types of deals know what they are doing.
The ability to properly analyze the pros and cons of any deal and to devise the best loan solution that is a win for all parties is challenging in any market. In today’s South Florida commercial real estate market, it’s even more important.
There are hundreds of billions of dollars in risky loans on the books at the present time. Many banks and conduit lenders are unsure about the futures of those investments. Private and Bridge lenders have learned from the experiences that these other lenders have had, and are taking proactive steps to ensure that history doesn’t repeat itself.
While there is substantial risk involved in bridge loans today, there are excellent ways of reducing that risk. Smart investors will turn to savvy, experienced commercial mortgage brokers to reduce that risk to more manageable levels, while still leaving ample room for lucrative profit potential for both the capital investors and borrowers alike.
