subprime commercial property financing
“What Is Subprime Commercial Mortgage Lending”
Some people will call subprime a secondary financing market or second chance funding that is available to those borrowers with a combination of cash flow, equity, and credit provides the basis for a lender to advance a mortgage at a higher rate of interest due to higher risk.
In the commercial mortgage financing market, depending on the geographic location, only about 1/2 of the market is funded through banks and institutional lenders with the balance capitalized by subprime lenders and borrower equity.
While there are many that hold the opinion that subprime is more of a lender of last resort, this is not necessarily the case and in fact this can be a lending vehicle of choice, especially if you have shorter time lines than what a bank financing process will require.
Subprime commercial mortgages can be placed for purchase, refinance, debt consolidation, construction, and bridge financing applications.
And there are lots of subprime or secondary financing sources, each working to carve out a niche in which to operate.
Even though there are many different sub prime lending sources and lending models, on the whole all of these sources of business property financing can be categorized in to 1) subprime institutional lenders; and 2) private mortgage lenders.
Subprime Institutional Lenders
Subprime institutional or quasi institutional lenders can include trust companies, merchant banks, pension funds, investment funds, and so on where funds are targeted towards a certain type of real estate, rate of return, and risk. The lenders are formalized organizations that directly or indirectly work with investor capital to place real estate mortgages on commercial property.
There are large capital holders in the global market place that seek to diversify their holdings through into real estate and do so through these quasi institutional lenders that can be wholly owned or outsourced.
While there can be considerable variability in what is offered from one of these lenders to the next, the commonality would center around what we would refer to as “near bank deals” where the borrower has not quite been able to get qualified at a bank, but is close enough to evolve into “A” credit financing in the near future.
Rates are higher than bank deals due to the higher inherent risk.
The terms tend to range from one to three years and can include prepaid interest, interest only, and amortized repayment.
One of the key aspects of subprime institutional lending that differentiates it from most of the private lending is the size of the deal that can be considered. Minimum deal sizes are typically $1,000,000 or higher with upper limits in the 10’s of millions.
Due diligence also tends to be more straightforward and streamlined as compared to a bank or institutional deal with funding timelines from application to advance of 30 to 45 days.
Private Commercial Mortgage
Private mortgage lenders are also part of the subprime commercial mortgage space.
While subprime institutional lenders will focus on cashflow, credit, and equity, private lenders are mostly concerned with the equity of the property, making them still higher risk lenders in most case.
That being said, there are lower risk private lenders that would overlap with the subprime or quasi institutional group.
Some of the bigger differences with private lending is deal size and lender profile.
Private lenders are primarily individual investors placing their own money, or working in small syndicates. There are also mortgage investment corporations or MIC’s that place investor money into mortgage investments.
90% of private money has a deal size of under $2,000,000 and a term of no more than one year.
Larger deals are more confined to MIC and larger syndicates.
One of the major benefits of private lending is the speed of deal completion which for smaller deals can be accomplished in a matter of days, and for larger deals, a matter of weeks.
So on average, private lending focuses on smaller loan size, faster placement, higher risk, higher rate lending than sub prime institutional.
If you can’t qualify for a commercial mortgage with a bank or institutional lender, or don’t have time to invest in their process, then the subprime commercial mortgage market is likely your next best option.