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Alternative lenders for commercial real estate projects

On Behalf of | Sep 30, 2016 | Real Estate Law |

Both the Office of the Comptroller and the Federal Reserve have recently been scrutinizing the commercial real estate lending practices of U.S. banks. As a result, some of these financial institutions have drastically cut back on their portfolios, leaving developers in Ohio and around the country to seek alternative sources of debt. This has allowed less-regulated entities such as hedge funds and buyout firms to increase their share of this lucrative market.

It is estimated that these entities are ready to loan upwards of $30 billion to developers for their planned office buildings, shopping malls, warehouses and other commercial projects. Researchers have found that the amount of money put into commercial real estate projects by private funds in July 2016 was nearly 40 percent higher than it was in July 2015.

All of this is coming at a price to borrowers, however. The interest rates charged by these companies are typically higher than those on commercial bank loans. One positive aspect is that private companies usually move faster than banks when it comes to approving a project. This is not to say that banks are completely exiting the market. Many of them are loaning money to these private companies, and according to the Office of the Comptroller, loans by regulated banks to these financial companies increased by nearly 25 percent in the fourth quarter of 2015 compared to the similar period a year earlier.

Commercial real estate development is not without risk, and the Federal Reserve has repeatedly issued warnings about a potential bubble. Despite this, projects continue to be proposed. A developer who is seeking financing may want to have the assistance of a real estate attorney who can review proposed loan documents from private lenders and help ensure that any provisions that may be troublesome are flagged and dealt with.