Institutional Lending versus Private Funding: What is the Best Fit for your Project?

Successful commercial real estate projects require a community need, a strong and collaborative team, the right location, and financing. While all four elements are key to success, no matter how incredible the project opportunity, the vision cannot move forward without capital. Financing is often the biggest hurdle developers face when getting their project out of the ground.

Recently, we have seen growing demand for private financing as traditional lending institutions have pulled back due to regulatory and capital constraints. What does this mean for developers? A greater need for private funding.

But what is the difference between a commercial loan with an institutional lender and funding from a private lender?

A significant factor is time.  With an institutional lender, the borrower is tasked with supplying a great deal of background information – from 3-5 years of tax returns to statements of cash flow and the guarantor’s personal financial documents – while often requiring top credit scores.  Information gathering can take weeks, followed by a lengthy review with an underwriting team who evaluates risk and profitability. If the lender is interested in the deal, a commitment letter is drafted that may include contingencies to be reviewed and responded to.  The last step before the contract is signed is a review by a loan committee which often takes a month or longer. If a borrower is successful, the process will likely take several months—or more—from start to close. If the loan is rejected at any point, the borrower must start the process over from the beginning with another lender.

When a borrower is working with a private lender like HALL Structured Finance (HSF), while risk assessment remains a key component of the process, it is streamlined, focusing on the project’s location and viability, and the make-up of the project’s full financing. Once the private lender understands the scope, if they are interested in the project, the term sheet or conditional commitment is drafted, typically within one to two weeks.  Once the conditional commitment is signed, the full underwriting process begins. The ability to work directly with an efficient and agile private lender can significantly reduce this time to as little as two or three weeks.  With a private lender, a loan can reasonably be closed within one or two months, depending on the complexity of the transaction. If the loan application is rejected, the borrower has the advantage of finding out about a decline within a couple of weeks versus months.  A private lender also has less regulatory obstacles and can be more creative and flexible with terms to best meet the needs of the borrower.

Most of HALL Structured Finance’s portfolio is comprised of construction loans in the hotel and multifamily sectors, with select office, industrial and mixed-use projects also included. Although conventional financing sources have become more restrained in virtually all real estate categories, the sector seeing the greatest difficulty is new construction, especially for hotels. However, the lack of financing options for new construction is not new.

The need for private financing grew exponentially after the financial crisis of 2000 and again after the crisis of 2008, both resulting in increased bank oversight and regulations which in turn resulted in less lending, especially for new construction. The current high inflation environment has caused conventional lenders to further narrow their lending range to include only their most favored (read: least risky) sectors.

Where conventional lenders see risk, we see opportunity: experienced borrowers with viable, shovel-ready projects but no access to financing at a reasonable level in relation to loan-to-costs. What makes HSF unique is a combination of entrepreneurial business approach with deep industry knowledge of real estate development, ownership, management, and finance. HSF is part of HALL Group, a multi-billion-dollar company with more than 50 years of experience in commercial real estate and finance, which allows our team to understand the needs of borrowers. Traditional lenders have small boxes in which to fit loans; HSF can create deals that work for each project’s unique circumstances.

Many of HSF’s borrowers are repeat clients. This is not by chance: HSF knows how to think like the borrower and evaluate alternative structures to close a good deal.

Contact our team to learn more.