Alternative Financing for Commercial Real Estate

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As the underwriting guidelines have changed drastically over the past few years, many commercial property owners and investors have been frustrated by attempts to obtain traditional financing for the purchase of commercial real estate. Generally, even buyers of cash-flow positive real estate are finding it extremely difficult to obtain financing. As prices of commercial real estate have slid over 30% in the past two years nationwide, owners of commercial property are finding it impossible to refinance their properties with traditional lenders such as banks or insurance companies.

The situation is difficult, but if commercial property owners and investors begin to think outside of the box then the opportunities to buy high quality properties or hold on to ones they already own, will soon improve. There are alternative sources and methods of financing that few would have considered in the boom times, but now appear to be increasingly attractive. Initially, investors and owners might be turned aghast at what seem to be the high interest rates and the prohibitive terms of new financing alternatives. However, times have changed and it is not productive to compare the rates and terms of existing financing options with those of yesteryear.

The successful investor of tomorrow will be making difficult decisions today and using alternative financing techniques and sources to ensure their financial success. Below are just a few of the options available right now to investors who are hungry to acquire commercial properties at a 30% or greater discount, and to those commercial property owners who want to hold on to their properties and weather the economic storm:

1. Private Money – Many banks and insurance companies have severely constricted their lending. Meanwhile, private lenders have been raising billions of dollars through debt offerings in a variety of funds. Private lenders are more likely to keep loans on their balance sheets. They are not packaging the loans to sell on the secondary market. Generally, they have a stringent set of underwriting guidelines that they follow and they are looking for commercial properties that meet their investment criteria. They are also not federally regulated. Many of these lenders will make bridge loans and can help property owners stay in business by supplying short term capital to fill a void where long term financing doesn’t exist.
2. Commercial Loan Modification – Many commercial property owners have seen their occupancy rates drop between 20% and 50% over the past two years. This has had a severely negative impact on their ability to stay in business. For those property owners who wish to avoid foreclosure, the opportunity exists to hire an intermediary to negotiate new terms for their existing commercial mortgage. It is important that the owner carefully research the background and experience of any company that he or she hires. It is also wise to obtain a money back guarantee on the services.
3. Trust Deed Investments – Loans made through trust deeds are similar to mortgages; however, in addition to the lender and borrower, there exists another party, the investor or group of investors. The advantage of trust deed investments to the investors, is the fact that they can be tailored specifically to the risk tolerance and income objectives of the specific investor. They provide a much needed source of financing in today’s tight credit markets.

Photo: SubZeroConsciousness

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.