The Benefits and Risks of Online CRE Lending
Over the past several years, the commercial real estate finance industry has seen increased regulatory oversight. The risk retention rules and increased reserve requirements, which go into effect at the end of 2016, will put even more pressure on traditional lending sources, limiting their capability to provide clients with construction loansfor new properties and refinancing of existing loans. With nearly $300 billion in loans coming due in the next 18 months, non-traditional lenders, including online marketplace lending platforms, will have an opportunity to fill the void and provide borrowers with access to alternative forms of capital.
A variety of online lending platforms have been developed for the purpose of funding commercial real estate deals, both on the debt and equity sides. Crowdfunding platforms fund deals online by raising varied amounts of money from many investors, pooling it to assemble the capital necessary to fund a deal. For the borrower, crowdfunding platforms can sometimes be seen as “best efforts” platforms, as the transactions are not fully funded until the investors supply the full capital amount.
Marketplace lending, or peer-to-peer platforms, take a different approach. On many of these platforms, borrowers and lenders are matched through online platforms. As a result, borrowers can often access funds more quickly and at better terms than by turning to many traditional lenders. Investors on these platforms range from individuals to institutional investors who are looking for risk-adjusted returns on alternative forms of fixed income investing.
Due to the growth of alternative lenders, products offered via these online platforms can make up the bulk of the capital stack, from permanent, to bridge, to mezzanine on the debt side, and equity and preferred equity on the equity side. For investors, each of these types of products offers different benefits and pitfalls. Generally, permanent and bridge loans contain the least risk, as they are secured against a property. Investors in commercial real estate debt also benefit from regular payments and returns on their investments, due to the loan structure. Alternatively, equity offers investors the ability to have a permanent stake in the real estate, but with no defined rate of return or duration of their outstanding investment.
As this market continues to grow, it is important that platforms rely on the fundamentals of commercial real estate in their lending practices. Every commercial real estate loan is different. There are significant complexities in evaluating properties and understanding commercial real estate cycles. As companies’ platforms continue to grow and fill the void in the marketplace, their teams will need to be made up of professionals with strong backgrounds in commercial real estate finance, ensuring that loans are originated and underwritten solidly. When executed correctly, online lending platforms are an effective and efficient way to fund commercial real estate loans, bringing capital sources traditionally unavailable to borrowers to the marketplace.
For the online lenders, commercial real estate creates a $3.3 trillion opportunity, the surface of which has yet to be scratched. Compared to other industries already involved in the peer-to-peer and crowdfunding market, such as consumer loans ($2 trillion) and student loans ($1.3 trillion), the opportunity for commercial real estate is dramatically larger. As loans continue to come due in the coming 18-24 months, especially in the small- to mid-balance space, and traditional lenders grapple with increased regulatory pressures, the online lending marketplace for commercial real estate is poised to provide borrowers with needed capital and give investors strong alternative investment options.
Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer with CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).
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