Financing available in cautious 90's - financing for commercial real estate - Finance

Real Estate Weekly, May 20, 1992 by Grace M. Pelligrino

The 1980's was the decade of conspicuous consumption, overspending and overborrowing and the real estate market was one of the biggest players in this game. During the 1980's, real estate finance became a virtual free for all and a good percentage of the projects that were funded should not have been. Therefore, due to widespread foreclosures on commercial property and bankruptcy of property owners and developers the banking industry was severely hurt and thus the entire real estate industry as a whole.

Currently, the banking industry is extremely cautious and conservative about funding any commercial projects and/or new real estate developments. However, this does not mean commercial real estate cannot be financed. There are many other avenues besides the traditional banking industry with which to finance projects.

One avenue developers and project principals can take is to seek foreign financing opportunities. Even with the current recession and soft real estate market many foreign banks and investors are actively seeking investments in real estate projects of all sizes here in the United States. The most active countries are Germany, Great Britain and Canada. Most foreign banks have offices here in the United States and each of them have their own criteria for financing. A good mortgage broker should have a good database of these types of lenders and should be able to direct projects to the right lending institution that best suits each project. However, a percentage of foreign lenders will only be willing to invest in a project if they can take equity in exchange for financing. Before a project is given to a foreign lender, ground rules should be laid out as to how much equity if any a principal is willing to give up in exchange for getting his project funded.

Another avenue for real estate finance is a real estate investment trust. There are thousands of trusts that regularly invest in real estate projects as well as technology, medical, entertainment, sale leasebacks and account receivable factoring. A real estate investment trust is either public or private and will either arrange a public offering or invest as private placement to their own account. A good many give straight traditional loans while others only offer financing in exchange for equity in a project. Again, a good mortgage broker should have a wide range of real estate investment trusts in their lender portfolio. This is a good avenue for-many projects that would be rejected by the traditional banking industry, however, real estate investment trusts do take a little longer to finance a project.

There are many private investors and mortgage banks that are very active in real estate finance during this soft market because they realize there ar@ many good projects they-can now have a chance to finance that would normally be financed at a traditional banking source. When the real estate market was strong, mortgage banks and private investors primarily financed hard money deals and did not have the opportunity to finance good projects. This is not the case any longer. However, a good many of these lenders do charge higher interest rates and points than would be charged by a traditional banking source. Before trying this avenue, a principal should set down limits as to how much they are willing to pay and how much a project can handle.

One of the keys to obtaining financing today is a fully detailed complete financing package. Competition for financing sources is fierce and the lender is in the drivers seat. With so many projects in the marketplace and far less lenders willing to finance, a good package is an absolute must. A professional real estate consultant or a Mortgage Broker should be hired to help prepare a package and seek funding on behalf of a principal. A good professional should know exactly what lenders are looking for and where to go with a project. Therefore, it will take far less time to find the right financing for a project. In today's soft real estate market a real estate consultant and/or a Mortgage Broker is probably the only way a project will make its way to the closing table. However, do expect the search for financing to take longer that it did five or six years ago. Good Luck!