Commercial real estate funding is predicated on finding financing sources compatible with project requirements and providing funds which can be equity or debt to consummate the deal. Equity represents cash infusion into a real estate project from partners, joint venture, etc to provide the necessary funding which is needed and is not a loan. Equity contributors become co-owners in a commercial real estate project and their ownership interest is determined by their contributing funds, ownership vehicle or partnership agreement. The participating equity can be cross collateralized from other commercial real estate holdings as well to fulfill the equity infusion requirement. The benefits of this arrangement are that funds are not borrowed and not required to be paid back. However, the equity partners participate in the downside and upside potential of the project and depending on the agreement inherent in the venture may be compensated during the course of operation and/or when the project is sold. There might be terms indicating if equity partners receive compensation first before distribution of any cash flow and other terms and conditions of distribution of funds or equity realized from the commercial real estate project.
Debt is essentially a loan given to provide the necessary funds to satisfy the required Loan to Value (LTV) as a condition of financing. The borrower is still required to provide a down payment or equity to qualify for funding, appease the lender with risking personal funds alongside lender funds and fulfilling underwriting requirements for borrower’s funds participation. There are many sources of commercial real estate funding pervasive in various markets. They represent funding sources compatible with project requirements and providing debt financing as needed and fulfill an essential function in the commercial real estate finance arena, examples of these sources are:-
Mutual Savings Banks
Life Insurance Companies
Pension and Retirement Programs
The last two, mortgage bankers and mortgage brokers are primarily intermediaries between lending sources and borrowers with some mortgage bankers funding and/or participating in some of their deals or acting as correspondences for select lenders with the responsibility of involvement in the loan origination to closing and servicing process including overseeing the underlying collateral securing the loan after funding. In this capacity their involvement in a loan can include originating the loan, collecting payments, inspecting underlying collateral, selling the loans to investors and/or overseeing foreclosure proceedings, etc. Mortgage Brokers source deals to lenders and receive a placement fee for their service. Their mortgage industry knowledge and acumen are paramount with increasing the funding success rate for projects as a result of screening funding requests and matching viable deals with interested capable lending sources. Intermediaries are able to navigate the capital sourcing landscape effectively reducing the timeline for securing funding, redundancy of effort and matching capital providers with appropriate CRE projects. Being engulfed in the dynamic capital market creates a platform for competent advisors to leverage their lender relationships, equity providers’ relationships, deal sourcing (as appropriate), etc to bring value to their respective clients.