Use a Commercial Private Equity Loan
A private equity loan is quickly becoming the loan of choice as the credit crisis is having a major impact in both America and Europe. Most U.S. citizens who are investing or planning to invest in commercial real estate are facing disastrous effects. Even if you have equity in your commercial real estate, a home equity loan is not available for this type of property. Since the bond market has stopped working as a supplier of capital as investment houses, insurance companies and multinational corporations have stopped making loans that can be sold to government and large securitized enterprises. There is basically a shortage of money to lend. Even good loans that can be approved are being turned away. Commercial real estate professionals are desperately scrambling in search of lenders who are willing to lend. As a result of this, borrowers are seeking alternative sources of funding such as private equity loan firms to meet their need for cash.
What are Private Equity Loan Firms?
Private equity loan firms are basically investment companies that have been set up in order to invest the wealth of their sponsors and investors. These are similar to hedge funds in some ways although they are structured in a dissimilar manner. Private equity loan funds are more flexible and creative when it comes to investment policy. Many developers and property owners who have developed a relationship with private equity loan firms enjoy a dependable source of money for their real estate enterprises. There are not many private equity loan companies that will make a private equity loan available to you on your commercial property. Despite this short coming, there are many firms that have a real estate division which are eager to make loans and take equity positions in the better deals that they come across. Most of these firms usually have some amount of proficiency in commercial real estate and likes to deal in mortgage paper.
How Do Private Equity Loan Firms Work?
Private equity loan firms are highly opportunistic entities which seek high returns. The interest rates these firms charge on private equity loans range from 15% to 17% and also tack on several origination points. The reason these loans are popular despite the exorbitant interest rate is because of their availability. Private equity loan companies give you loans based on the amount of equity you have build up on the commercial real estate that you plan to keep as collateral and not depending upon your credit score. Thus even if you have a credit score that is not something to boast about, you would still qualify for an equity based loan from a private equity loan firm. Since a private equity loan firm is protective of its investment capital, a significant amount of equity is demanded for any deal being funded. Very rarely the amount of a private equity loan will exceed 65%-70% of the value of your target property.
Despite its drawbacks, a private equity loan is becoming the loan of choice as it is gaining momentum in a market facing scarcity of cash flow when it comes to commercial property financing.