The commercial real estate (CRE) financing landscape is undergoing a significant transformation. While traditional banks have long been the primary source of capital for property owners and investors, recent years have witnessed a surge in non-bank financing options. As lending standards tighten and the market grows more complex, borrowers are increasingly exploring new avenues to fund their projects
What Is Non-Bank Financing in CRE?
Non-bank financing refers to capital sources outside of traditional banks and credit unions. These include:
- Private debt funds
- Mortgage Real Estate Investment Trusts (REITs)
- Crowdfunding platforms
- Family offices and high-net-worth individuals
- Insurance companies
- Hard money lenders
These lenders often offer different risk profiles, approval processes, and loan structures compared to banks, providing borrowers with greater flexibility and speed.
Why Are Borrowers Turning to Non-Bank Lenders?
Tighter Bank Lending Standards:
Many banks have become more conservative, imposing stricter requirements or reducing their exposure to CRE, especially for properties in transition or in challenged sectors.
Speed and Certainty of Execution:
Non-bank lenders can often move faster than banks, making them attractive for acquisitions with tight timelines or situations requiring quick bridge financing.
Flexible Structures:
Private lenders may offer interest-only periods, higher loan-to-value ratios, or customized repayment schedules. This flexibility can be crucial for properties undergoing repositioning or lease-up.
Creative Solutions for Unique Properties:
Non-bank lenders are sometimes more willing to finance properties that don’t fit the standard mold, such as mixed-use developments, adaptive reuse projects, or assets in secondary markets.
Types of Non-Bank CRE Financing
Private Debt Funds
Private debt funds pool capital from institutional and individual investors to make loans on commercial real estate projects. These funds often target higher yields by lending where banks may not, such as on transitional or value-add properties. They can offer flexible structures, faster decision-making, and are willing to take on more complex deals that require creative financing solutions.
Mortgage REITs
Mortgage Real Estate Investment Trusts (REITs) provide both senior and mezzanine debt for a wide range of commercial properties. As publicly traded or private entities, mortgage REITs have access to significant capital and can fund larger transactions. They are active in both stabilized and transitional assets, and often offer competitive terms, though they may require more rigorous reporting and oversight.
Crowdfunding Platforms
These online platforms allow many individual investors to pool their money and invest in commercial real estate projects. Crowdfunding can provide both debt and equity capital, often for smaller or niche deals. The process is typically streamlined, and borrowers may benefit from a wider investor base and innovative deal structures.
Family Offices and High-Net-Worth Individuals
Family offices and wealthy individuals often invest directly in CRE, either through loans or joint ventures. They can offer highly customized terms, patient capital, and a relationship-driven approach. This source is especially valuable for unique projects or when a borrower seeks a long-term partner rather than just a lender.
Insurance Companies
Insurance companies are major players in the CRE debt market, often providing long-term, fixed-rate loans for stabilized, high-quality properties. They typically favor lower-risk, lower-leverage deals and offer borrowers the benefit of predictable payments over extended periods. While their underwriting standards are strict, their loans can be attractive for borrowers seeking stability and reliability.
Hard Money Lenders
Hard money lenders specialize in short-term, asset-based loans, typically at higher interest rates and fees. They focus primarily on the underlying value of the property rather than the borrower’s creditworthiness. These lenders are ideal for borrowers who need quick access to capital, are facing credit challenges, or have properties that require rapid acquisition or renovation.
Pros and Cons of Non-Bank Financing
Pros:
- Faster approvals and closings: Non-bank lenders can often close deals in weeks, not months, a major advantage in time-sensitive acquisitions or refinance situations.
- More flexible terms: From interest-only periods to customized repayment schedules, these lenders can accommodate properties in transition or unique borrower needs.
- Wider asset acceptance: Projects that banks shy away from, like mixed-use developments, vacant buildings, or second-tier markets, often find a home with private lenders.
- Less red tape: Private lenders typically require less red tape, fewer covenants, and simpler documentation compared to institutional bank underwriting.
Cons:
- Higher cost of capital: You’ll generally pay a premium for that flexibility. Rates and fees can be meaningfully higher than traditional bank debt.
- Shorter loan terms: Many non-bank loans are structured as bridge or transitional financing, which means shorter maturities and the need to refinance sooner.
- Extra information from borrowers: Private lenders may require deeper insight into the borrower’s business plan or exit strategy, especially on transitional assets.
- Less consistency: Less regulation means less consistency. Not all private lenders are created equal.
When to Consider Non-Bank Financing
Bridge Loans: When you need quick, short-term financing to acquire or reposition a property.
Value-Add or Transitional Assets: If your property needs renovations, lease-up, or other improvements before qualifying for permanent financing.
Unique or Complex Properties: When the asset doesn’t fit standard bank parameters.
Speed Is Critical: If the deal timeline is too tight for traditional bank underwriting.
Conclusion
As the CRE financing landscape continues to evolve, understanding and leveraging alternative financing options can provide borrowers with the flexibility and speed needed to fund their projects successfully. Exploring these non-traditional avenues may open doors to opportunities that traditional bank loans cannot offer.
Interested in exploring non-bank financing for your next project? Contact the i95 Capital team for more insights and personalized financing solutions.
