Investing in commercial real estate in California and other states offers substantial potential for financial growth and long-term returns. However, securing the capital for such ventures from banks and traditional lenders can often take a long time and is subject to cumbersome regulations.
Private lenders like Enact Partners offer alternative financing options for builders, developers, and investors interested in business purpose loans for commercial real estate projects. At a time when many banks have become averse to lending for commercial real estate projects (or stopped altogether), private lenders offer many advantages, such as availability of capital, flexible terms, faster approval processes, and less paperwork.
Working with private lenders like Enact Partners, borrowers also gain direct access to lending decision makers, something rarely possible with banks.
Naturally, there are certain advantages or disadvantages associated with using private lenders for commercial real estate acquisition and investment. Whether working with a private lender is the right call often depends on the unique circumstances of a project, the borrowers, and timing.
The fact that private lenders usually charge higher interest rates compared to traditional banks or credit unions can be off-putting to borrowers. Because working with a private lender is typically easier and faster than working with a bank, this costs a premium. Additionally, private lenders often fund deals that traditional lenders won’t consider, such as properties needing significant repairs or renovations—all of which are riskier, thus the higher interest rates.
Of course, these higher rates are mitigated by the fact that most commercial real estate loans are short-term (three years or less) vs 15 or 30 years with a traditional lender. That means there is a lot less interest paid out over time, with the overall cost is generally not that much more compared to longer-term loans.
Private lenders also tend to require greater amounts of collateral to secure a loan compared to traditional banks, usually in the 25-60% range for construction and land loans. Private lenders want borrowers to put up more collateral so borrowers have “skin in the game,” making them less likely to miss payments or default on the loan, which would risk loss of the collateral.
Other Upsides of Working with Private Lenders
- Flexibility in Loan Terms: One of the primary benefits of private lenders is their flexibility regarding structuring loans. Unlike traditional lenders, private lenders can tailor loan terms to meet the borrower’s specific needs in regard to timing, repayment schedules, and collateral requirements, which can be advantageous with complex commercial real estate projects.
- Speedy Approval Process: Private lenders often have a faster loan approval process than banks or financial institutions. Traditional lenders have stringent underwriting processes that can be time-consuming and frustrating for investors, often taking months up to a year. Private lenders, on the other hand, tend to have more streamlined approval procedures, enabling borrowers to secure funding quickly. This speed can be instrumental in competitive markets where timing is critical.
- Expanded Access to Financing: Private loans provide an alternative funding source for investors who may not qualify for traditional loans. Private lenders are typically more interested in the value of the financed property, the underlying financial fundamentals, and the likelihood the borrower will complete the intended project rather than the borrower’s credit score. Private lenders focus more on the investment’s collateral value and potential profitability, making them more willing to extend loans to borrowers who might not qualify for a traditional bank loan. This expanded access to financing opens up opportunities for a broader range of investors.
- Ability to Tell Their Story: When working with private lenders, borrowers often have the advantage of direct communication with lending decision makers. This direct interaction allows borrowers to present their case, discuss their plans, and advocate for their project. Unlike traditional lenders who follow strict guidelines and Federal regulations, private lenders can be more receptive to individual circumstances and investment strategies. Of course, as responsible lenders, private lenders must still follow due diligence on all loans to ensure the value of the project is sufficient to cover the loan if the borrower can’t (or won’t) pay it back.
A True Lending Partner
Private lenders can be a viable financing choice for commercial real estate loans. They offer flexibility, fast turn-around times, expanded access to financing, and the ability to access lending decision makers. Borrowers need to decide for themselves whether higher interest rates and shorter loan terms outweigh the value of being able to access capital quickly to seize upon emergent business opportunities.
The Enact Partners team has decades of experience in commercial real estate development and investment, so we understand that business and investment opportunities can’t wait, and that speed, ease of closing, flexibility, creativity, and direct access to lending decision makers are important to borrowers. We invite you to reach out to us today to discuss your borrowing needs. We’re happy to help you weigh options for getting your commercial real estate project funded and off the ground.
Contact Us About Your Borrowing Needs
(760) 516-7776 | [email protected] | www.enactpartners.com
