What Are the Different Types of Private Lenders?
In the private commercial real estate lending industry, there are several types of private lenders 1) a private individual, 2) a private equity fund or firm, 3) a family office, 4) a hedge fund, and lastly, 5) a self-funded specialty finance company.
There are also subsets within these types of private lenders, those who go after more risky loans at higher rates, often referred to as hard money, those who look for less risk at moderate rates, and those who are very conservative and look for unique situations where a lower rate is appropriate.
Some private commercial real estate lenders focus on income producing properties only, while others focus on transitional or distressed properties, and others on construction or land loans, and some private lenders go after more than one focus.
There are also private lenders that make SBA loans, and some that make loans but will also put equity into real estate projects.
Different private lenders also offer different terms, however in the industry of private lending, most lenders look to provide short-term interest only bridge loans, while some also offer long-term fully amortized loans.
A common capitalization model for particularly private equity firms and funds that provide commercial real estate financing is the raising of some capital from private equity investors, blended with lower cost money from institutional or bank credit lines.
There is also a big differentiator between discretionary lenders and lenders who must seek the approval of their backer. With a discretionary lender, there is usually a single fund manager or sometimes a credit committee who have the discretion over deploying capital.
With a nondiscretionary lender typically the backer of the lender, which can be a bank or a fund of some sorts, requires that their credit committee approve or decline loan applications, therefore making it more advantageous to work with a discretionary lender to minimize the potential of a late stage file decline by the backer.
A nice blending of the two types of lenders is the use of a private label funding program where a discretionary lender handles everything on the back-end of the customer facing lender, in which case for example when the lender issues a term-sheet, it is really the back-end discretionary lender who has reviewed and pre-approved the loan request, and then generates the term-sheet in the name of the front-end lender.