Evaluating Alternative Lending Platforms and Their Prospects Going Forward

Traditionally, commercial real estate borrowers’ only option was to approach banks or other traditional lenders when seeking out a loan, a process that can be inconvenient and time consuming. Today, a wide variety of commercial real estate alternative lending platforms exist that can provide convenience and time savings, as well as flexibility for borrowers who may not be able to get loans approved from traditional lenders for a host of reasons. These platforms
offer many benefits to lenders as well, such as direct access to loans, resulting in lower costs and higher returns.

What’s the Market for CRE Alternative Lending Platforms?

Commercial real estate presents a $3.3 trillion opportunity for online lenders — far greater than other peer-to-peer markets such as consumer ($2 trillion) and student loans ($1.3 trillion).

With nearly $300 billion in loans coming due in the next 18 months, alternative lenders in commercial real estate will have opportunities to fill the void left by other lenders, curtailing their lending activities and giving borrowers quicker access to funds at better terms than what may be offered by many traditional lenders. According to American Banker, the industry has grown by nearly 700 percent over the past four years. These platforms are already shifting the world of commercial real estate finance, and will only continue to grow over the next several years. With increased regulatory oversight within the commercial mortgage-back securities (CMBS) and banking industry in recent years, the pressure on traditional lenders is increasing, limiting their ability to provide new construction loans and refinance existing loans. As a result, alternative lenders are moving in to fill the gap and will become more necessary than ever to keep up with the demand for capital.

Crowdfunding vs. Marketplace Lending
Crowdfunding is one alternative lending method that is gaining popularity in the commercial real estate space. While these platforms typically raise money from many different investors, if not enough people contribute to fund the full transaction, all of the investments may fall through. Crowdfunding platforms also typically have limited options when it comes to loan terms and don’t match borrowers and investors based on the best fit, making it a less effective
platform than more tailored lending platforms.

Marketplace or peer-to-peer lending is another popular option. These platforms match borrowers and lenders, giving borrowers timely access to funds from either individual or institutional investors, depending on the platform’s strategy. The marketplace lender sources, underwrites and services the loan, while marketing it to potential investors, typically after it has been funded. The lenders set the loan rates and terms of the loans they originate.
What is the Role of Technology?
In addition to expediting the process of finding an appropriate borrower or lender, marketplace platforms allow investors to review a variety of investment options in one place, do their research, and stay up-to-date on the latest investment opportunities. Investors and borrowers are updated in realtime during each step in the loan transaction, increasing transparency and reducing the back-and-forth lag in communication that occurs with traditional lenders.
Technology allows these platforms to be more accessible and easier to navigate, but the key is to have a team of knowledgeable professionals in commercial real estate financing with years of underwriting experience behind the company. Alternative lending platforms should use technology when beneficial to streamline processes, but investors and borrowers should be wary of platforms that use technology at the expense of human judgement.
What Are the Benefits of Commercial Real Estate Marketplace Lending?
In addition to providing much-needed capital for borrowers, marketplace lending offers investors access to a wide range of commercial real estate debt at varying rates of return that are typically highly-competitive, and often better, than other fixed-income investments. Marketplace lending offers many options, from smaller interests in larger loans to whole loans, for investors seeking higher yields than those offered by traditional fixed-income investments, such as CDs and U.S. Treasury bonds.
In addition to attractive yields, the fact that real estate debt is secured by collateral — unlike unsecured debt such as car or student loans and credit card debt — makes it a less risky investment prospect. Often times the investment property is income-producing, further reducing the risk in comparison to unsecured debt.
How Should Investors Evaluate Potential Opportunities?
Marketplace lending can be more effective and efficient than traditional loans, but only if done correctly. Every commercial real estate loan is different, and both investors and borrowers need to find the platform that is most appropriate for them based on the underwriting process and criteria. A casual investor looking to invest $1,000 has different requirements than an accredited investor with $250,000 in capital. Alternative lending platforms need to have experienced teams on staff to ensure lenders and borrowers are matched appropriately, that both parties are educated about the terms of the loan and that the loans are originated and unwritten correctly
Besides the loan platform itself, there are many types of commercial real estate loans investors can choose from when evaluating potential opportunities. Each opportunity should be evaluated based on the investor’s goals, risk tolerance, timeline, diversification preference and overall portfolio strategy, but there are some general rules to keep in mind
Permanent and bridge loans typically are less risky because they are in a first lien position, secured against a property, and the loan structure has a defined rate of return with regularly scheduled payments. Equity loans, on the other hand, do not have a defined rate of return but offer the ability to have a permanent stake in the real estate. For investors seeking more diversification and less risk, professionally managed, low-cost commercial real estate funds that pool these investments can be an attractive option that some marketplace lending platforms offer.

Gary Bechtel serves as president of Money360, the leading commercial real estate marketplace lending platform that caters to institutional and accredited retail investors. Prior to joining the company, he was chief lending/originations officer of CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO). He can be reached at garybechtel@money360.com or (949) 525-9311. Learn more at money360.com.