Guide Category: Commercial Real Estate Loans

The Private Lending Landscape for Multifamily

The reason multifamily has historically been a highly desirable asset class for private mortgage lenders is they are generally easy to rent since everyone needs housing, and there are tons of long-term financing options offered by conventional lenders, plus there is a government backed secondary market for multifamily properties.

Most private lenders are always thinking about what would happen if the borrower defaults on the loan and it results in a foreclosure. Since they have historically been so easy to sell, lenders are typically not worried about the prospect of taking back a multifamily property in the worst case scenario.

The majority of private lending firms in the United States focus on residential investment properties with 1 to 4 units, but almost all of them will lend on multifamily properties. Some only consider smaller multifamily up to 10 units. Others don’t care how many units there are, so long as the deal doesn’t exceed the maximum amount they can lend.

There is another sector of private lending that focuses on commercial real estate, and ALL of those lenders offer short-term loans for multifamily properties. Many of them offer rehab loans for multifamily value-add projects, and we know a few lenders that are 100% focused on these types of deals.

Historically, most of the commercial real estate private lenders have offered a higher maximum loan-to-value for multifamily as opposed to other asset classes. We can give you a common example with private lenders in our network…

For the purchase of a stabilized multifamily property, a lender would fund up to 75% of the purchase price, but for all other commercial property types, the maximum would be 65%. For multifamily value-add projects, private lenders would typically fund 80% to 85% of the purchase price, plus 100% of the rehab budget, so long as the loan amount is not more than 75% of the completed value. The reason that private lenders will go that high is the permanent financing will typically go up to 75% or 80% LTV.

Multifamily Challenges in 2023

For multifamily properties, private lenders always assess the long-term financing options available to the borrower since that’s the exit strategy for the short-term bridge loan. Even if the borrower plans to rehab and sell the property, the end buyer will likely need permanent financing. If the deal doesn’t pencil out to qualify for long-term permanent financing, then most private lenders will be reluctant to offer a bridge loan. And this brings us to the 3 primary concerns that private lenders have with multifamily properties in 2023.

Since interest rates started skyrocketing last year, it’s become harder for multifamily investors to qualify for permanent financing. Most lenders require a debt service coverage ratio (DSCR) of 1.2, but the high interest rates are putting some deals into a negative DSCR which is killing a lot of purchase transactions.

And that leads us to the second major concern that lenders have which is multifamily cap rates are too low, and values need to fall in order for purchase deals to make sense. Some lenders are anticipating that values will start to come down this year, which means that lenders will be more conservative with their maximum loan-to-value.

The third concern that many private lenders have is there will be too much multifamily supply this year due to overbuilding in various markets throughout the country. As many of the large apartment construction projects are completed and hit the market, it could cause market rents to drop. This dilemma will only affect certain parts of the country, but it’s another challenge that might contribute to a decline in multifamily property values.

Many Multifamily Investors Using Private Lending in 2023

Many multifamily investors are turning to private lending this year to get deals done and to buy time until interest rates go back down. For a purchase bridge loan, investors may need to put more cash into the deal than they are used to. Most lenders are requiring a 30% to 35% cash down payment.

Multifamily investors that have a loan maturing this year are in a really tough spot. If they can afford to pay the high interest rates, a bridge loan may be a solution for up to 2 years, but the maximum LTV will likely be 65% to 70%. And most lenders are not offering cash out when refinancing a maturing loan. To get cash out in this environment, the loan-to-value would likely have to be under 60%.

We don’t see many lenders promoting ground-up construction financing for multifamily this year, but many private lenders are still funding multifamily rehab value-add projects. The loan-to-purchase and loan-to-cost hasn’t changed much for most lenders. You typically need to contribute 20% to 25% cash to the purchase, and the lender will fund the rest.

However, the after-repair value requirement is likely to be lower than what it was in the past. We see some lenders still advertising a maximum loan-to-completed value of 75%, but this number is really dependent on whatever qualifies for permanent financing. It’s not possible to determine this number until the lender does a full analysis of the deal. They need to review the rent roll, expenses, market rents and much more.

In January 2023, we visited I Fund Cities‘ office in Philadelphia and learned they are still funding ground-up construction loans for multifamily properties in many markets throughout the country.

Private Lending Interest Rates for Multifamily Properties in 2023

As of February 2023, the interest rates for most multifamily bridge loans are in the range of 9% to 11%. You may find a handful of lenders in California that can go lower. For example, one lender in our network, Diversified Mortgage Co., is currently lending the high 7’s for multifamily properties in California, and they offer a 2-year or 4-year loan term. Most bridge loans max out at 2 years, but a few lenders in our network are fine with longer terms.

One private lender in our network, IceCap Group, recently launched a DSCR loan program just for multifamily deals. The loan terms are either 3 years or 5 years, and the interest rates are currently in the 7% to 8% range for most deals. This program is offered in most states throughout the country, but the maximum loan amount is $5,000,000.

Obviously, Private lending Interest rates may increase throughout this year if the federal funds rate goes up. We’ll continue to publish new guides and videos updated every quarter as the market changes.

How to Find Multifamily Private Lenders

If you’re ready to search for a lender for a multifamily deal, use our website PrivateLenderLink.com as a resource. All the private lending companies listed on the site have a very detailed profile that shows their lending guidelines, and you can contact each lender directly. There are two options for using our platform.

Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located.

Select of the following loan types:

• Private Money
• Hard Money
• Commercial Bridge
• Commercial Property Value-Add

Private Money and Hard Money will provide the same results, mostly lenders that focus on residential investment properties. You may find additional lenders by selecting Commercial Bridge, although most of them have a high minimum loan amount.

Browse Lenders 

 

Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

Get Started

In real estate finance, the meaning of the term “multifamily” is defined as a property with five or more dwelling units. If a property has less than 5 units, it’s classified as residential property. Properties with more than 5 units are classified as commercial real estate.

When you’re seeking a bridge loan, a rehab loan, or a long-term rental loan for a property with less than 5 dwelling units, don’t call it multifamily.

Terminology for Multi-Unit Residential Real Estate

The terminology you use for multi-unit residential properties depends on the number of units:

• 2 Dwelling Units = Duplex
  • Or a 2-unit residential property
• 3 Dwelling Units = Triplex
  • Or a 3-unit residential Property
• 4 Dwelling Units = Fourplex
  • Or Quadplex
  • Or a 4-unit residential property
• 3 Dwelling Units + 1 Retail Unit = Mixed-Use

The classification of residential versus multifamily is mainly relevant for the long-term loan which refinances a short-term bridge or rehab loan provided by a private mortgage lender. While there are lots of conventional lenders that can take out a short-term private loan on a dwelling property, the majority of them only consider residential investment properties with 4 units or less.

Most private lenders that would offer a short-term loan a 4-unit residential property would also consider a 10-unit multifamily property. For a short-term bridge loan (less than 2 years), multifamily properties are almost always considered by private lenders.
In 2018, many private lending companies started offering 30-year rental loans at interest rates similar to conventional loans, but only for properties with up to 4 units. Some private lenders can go up to 8 units for a 30-year loan.

How to Find Multifamily Private Lenders

If you’re seeking private financing for a multifamily property on our platform, you have 2 options:

Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly. Send an email, call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located. A few loan types will show lenders that consider multifamily properties:

• Private Money
• Hard Money
• Commercial Bridge
• Commercial Property Value-Add
• Commercial Ground-Up Construction

Once you see the search results, you can use the Property Type filter, in this case it’s not necessary because all private lending companies will lend on multifamily properties. The number of units may be a factor.

Browse Lenders 

 

Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

Get Started

The maximum leverage can vary widely based on the asset class, the loan type, the property’s location, and the market conditions at the time of funding. This guide was written in January 2022, in a strong real estate market with record-low interest rates.

Max Leverage for Refinance Bridge Loans

The maximum LTV is 75% for industrial, multifamily, and mixed-use properties which are majority multifamily. It may be possible to go that high for office, retail, and self-storage properties, but most lenders will max out at 70% for these 3 asset classes. For non-core assets such as hotels, healthcare, assisted living and others, the maximum LTV is 65%.

There are some exceptions to these numbers. For example, lenders that are very comfortable with hotels may lend up to 70% LTV for a refinance bridge loan. Some lenders max out at 65% LTV for all asset classes and loan types. There are also a few bridge lenders that consider vacant land as collateral, and the maximum LTV for land is typically 50% of the as-is value. If the land is not entitled, the maximum could be lower.

If you really need to get higher leverage for your deal, a small number of CRE private lenders provide mezzanine financing in 2nd lien position behind another lender, and the maximum combined LTV may be as high as 85%. Mezz financing is not commonly offered for a refinance; it’s more popular in acquisitions.

One final thing to note about refinance bridge loans – if the loan request includes any cash-out funds, many lenders become more conservative and reduce their maximum LTV by at least 5%.

Max Leverage for Acquisition Bridge Loans

For a stabilized commercial property with no major rehab or value-add component, the maximum leverage is typically the same as refinance bridge loans:

• Multifamily, Industrial, Mixed-Use Multifamily: 75% LTP
• Office, Retail, Self-Storage: 70% LTP
• Hotel, Healthcare, Others: 65% LTP

When we talk about leverage for acquisitions, we prefer to use the term loan-to-purchase price instead of loan-to-value, just to be clear that the price is the value. If you feel the value is much higher than the purchase price, it likely won’t affect the maximum leverage. You’ll still need to contribute 25% to 35% equity to the deal in the form of cash or equity in another investment property.

Max Leverage for Value-Add Projects

When an acquisition bridge loan is for a value-add project, the loan-to-purchase price is typically higher for multifamily, but not so much for other asset classes. We know a number of bridge lenders that fund up to 85% of the purchase for a multifamily property, plus 100% of the renovation budget, so long as the loan amount does not exceed 75% of the completed value.

You’ll find a similar structure with other asset classes, but with slightly lower leverage. Some bridge lenders max out the renovation budget at the same number as their loan-to-purchase price. For example, 75% of the purchase price, and 75% of the renovation budget. So the borrower/sponsor would have to contribute 25% of the total project cost in cash.

It may be possible to get mezzanine financing to increase the leverage. As stated earlier, the maximum combined LTV for mezzanine financing is 85%, and there are a number of creative ways to structure deals with a Mezz loan.

Max Leverage for Ground-Up Construction

The maximum leverage for ground-up construction projects is much more conservative. Most lenders max out at 75% of the construction costs.

Even if the land is owned free-and-clear and has lots of equity, the developer (borrower) typically needs to contribute at least 25% cash to the deal, while also maintaining cash reserves, in case the project goes over budget.

The majority of private lending firms that offer construction financing will only consider funding the vertical phase, once the project is shovel-ready. However, there are some lenders that will fund the horizontal land development or even the land acquisition along with the construction financing. In these cases, most lenders max out at 50% LTV for land, so the developer’s down payment would be 50%.

We know a few lenders that offer up to 65% of the land acquisition, but only if the project is entitled and close to being shovel-ready. Some lenders that advertise a maximum LTV of 65% for land may be referring to “covered” land, which means the property has an old structure on it that will be torn down.

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When the real estate market begins to slow down and values fall, lenders typically reduce their maximum loan-to-value by 5% to 15% just until values stabilize, and then they’ll slowly increase their leverage. If and when there’s a significant change in the maximum leverage ratios, we’ll update this guide to keep you informed.

How to Find CRE Private Lenders

One thing that can be frustrating when you’re researching lenders online is many of them don’t break down their maximum leverage by deal type or property type. For example, a lender may state the maximum LTV is eighty percent, but that may only apply to the acquisition for a value-add project and not for a standard purchase or refinance bridge loan. Some lenders do this with the goal of getting many brokers and investors to inquire so they can grow their database.

If you’re looking for a private lender to fund a commercial property deal, use our website as a resource. There is no fee to search for lenders and make contact with them directly.

1. Start at the Browse Lenders page
2. Select a Commercial loan type
3. Type in a state or major metro area, and click SEARCH
4. Click REFINE RESULTS if you want to filter the list
5. View each lender’s profile to learn about their guidelines, pricing, and much more
6. Click the green CONTACT button and reach out to the lender directly

We also have a great system to make your search for lenders more efficient. Click the ‘Create a Loan Request’ button to enter your deal information. Save it, then invite select lenders to view it, and they can message you directly through our platform. Please remind each company that you found them on PrivateLenderLink.com.

If you’d like some assistance with your lender search, you can click a button to request recommendations from us. We’ll view the deal and invite a few select lenders, some of which may not have a public profile on the site.

The majority of commercial real estate (CRE) private lenders will only consider the four asset classes commonly known as “core properties”:

1. Multifamily
2. Office
3. Retail
4. Industrial

Every other type of property besides these four can be considered “specialty”, and here are a few examples:

• Assisted Living Facility
• Hotel
• School
• Church
• Hospital
• Cattle Ranch
• Theater
• Race Track
• Car Wash
• Winery
• Casino

You can group specialty commercial properties into one of a few popular categories: 

• Hospitality
• Healthcare
• Automotive
• Storage
• Agricultural
• Recreational

Some private lenders in our network will consider specialty commercial properties, but only specific types. For example, within the Healthcare sector, some lenders will consider a clinic, but they won’t consider an assisted living facility. In the Automotive sector, they may consider a parking garage, but not a gas station or auto body shop because those properties tend to have environmental issues.

Why won’t most bridge lenders consider specialty commercial properties?

It’s all about the possibility of foreclosure. If the borrower defaults on the loan, the lender may have to start the foreclosure process and could end up owning the property. Most lenders would want to quickly sell the property to recover their loss, and specialty properties are difficult to sell because there aren’t as many potential buyers as there would be for a core commercial property. 

Some lenders will only consider a specialty property that has the potential to be repurposed into a core commercial property, which would be easier to sell. But the majority of lenders would not want to make an effort to repurpose the property. That could take a lot of time and money which may add to their loss from the loan default.

Lender’s Risk of Having to Operate the Business

Besides disposing of the property in case of a foreclosure, another thing for lenders to consider is having to operate the business using the property, prior to the sale, if the borrower is also operating the business. Some examples include a hotel, an assisted living facility, a car wash, or a gas station. Most provide lenders cannot just step in and operate these businesses to keep up the property’s cash flow. 

Perhaps if the borrower is leasing the property and not operating it, or if the lender has relationships with local competitors to that business who would be ready to immediately take over, a private lender may consider it. 

We know a few private lenders that love to lend on hotels because they also own and operate a portfolio of hotels, separate from their lending business. This doesn’t mean that they just loan to own, but they have a deep understanding of the hotel business, and can easily take over operations in case of a foreclosure.

Guidelines for Specialty Property Bridge Loans

Although they are not easy to find, we do have several private lending companies in our network that lend on a variety of specialty commercial properties, including wineries, marinas, schools, hospitals, and even places of worship. The maximum loan-to-value will be much more conservative than a core commercial property. For example, a lender may go up to 70% LTV for a warehouse, but a specialty property would max out at 50% or 60%. If the borrower can pledge another investment property as collateral, that may help get the deal done. 

Interest Rates and Fees for Specialty CRE Bridge Loans

The pricing is typically higher for a specialty property versus a core commercial property. The interest rates for core commercial real estate ranges from 7% to 9.5%. Specialty properties could be in this range as well, but most lenders will price in the range of 9% to 12%. As of late 2021, we are not seeing bridge loan rates go higher than 12%. 

Most lenders charge an origination fee (points) ranging from 1% to 2.5% of the loan amount, for core commercial properties. Specialty properties could be priced higher, ranging from 2% to 3.5%. 

How to Find Bridge Lenders for Specialty Commercial Real Estate

If you’re looking for a private lender to fund a specialty commercial property, use our website as a resource. There is no fee to search, and we have a filter you can use to find out which lenders consider specialty properties.

1. Start at the Commercial Bridge Lenders page
2. Type in a state or major metro area, and click SEARCH
3. Click REFINE RESULTS in the Filters section
4. Click the PROPERTY TYPE field 
5. As soon as you select a property type, the search results will be filtered
6. View each lender’s profile to learn about their guidelines, pricing and more
7. Click the green CONTACT button and reach out to the lender directly

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.

 

When property owners and mortgage brokers ask us for lender recommendations, many want lenders that don’t require appraisals. The reasons are obvious – time and money. Commercial property appraisals can cost thousands of dollars and take 2 to 3 weeks to produce. The cost and schedule can vary depending on the property type, the size, and how busy appraisers are in that particular market.

Due Diligence Deposits

If you find a bridge lender that does not require an appraisal, it will likely save you time, but it may not always save you money. In commercial real estate finance, it’s very common for lenders to collect some sort of payment when the term sheet is signed to cover due diligence costs. This may be structured as a deposit, so that most of the funds go toward actual costs, and whatever amount is left over will be applied toward closing costs or origination fees.

The deposit amount typically ranges from $2,000 to $10,000. It could be higher for complex property types, loans that include multiple properties or large loan amounts over $10,000,000. As soon as the deposit is paid, there is a solid commitment from the borrower, and the lender will get to work right away.

One quick note about deposits and due diligence:
Even lenders that do require a formal appraisal will typically charge a deposit for due diligence on commercial real estate deals. The appraisal fee may be included in the deposit, so that the lender will pay for the appraiser instead of the borrower paying the appraiser directly. I’ll make a separate video to discuss due diligence fees in detail.

In-House Valuations

When a lender does their own in-house valuation, it may take a lot of time and resources, especially for large commercial properties worth over $1 million. There’s more to the valuation process than researching and crunching numbers. The lender will likely want to do a site visit and visual inspection. So you’re paying for airline tickets, a rental car, meals and maybe a hotel room. Even if a lender is local to the property, they may still charge for travel costs and time.

We’ve seen some cases where a lender will pay for a third party inspection in lieu of them doing a site visit, but it’s not very common. Some lenders that do their own valuation may still reach out to a local real estate office to get a Broker Price Opinion. This could be another expense.

If you can find a lender that has a local office within a 1 to 2 hour drive of the property, that could save you some money on the due diligence costs, but you also have to consider the pricing for that loan. Perhaps a national lender would offer better pricing than the local lender, even if the due diligence costs are higher.

Other Considerations When Avoiding Appraisals

For those of you who are adamant about working with a lender that doesn’t require an appraisal, we want to mention a possible scenario that could open up your mind about getting a formal appraisal.

Lenders that do their own in-house valuation may be more conservative on the value than an appraiser. You may be certain the property will appraise for a certain amount, but the lender comes up with a much lower number just because they want to be more conservative. If that happens, you may find yourself in a tough position.

Here’s a sample scenario we’ve seen….

You find a lender that doesn’t require an appraisal, you explain the loan request and provide some info on your financial strength, including a list of all your assets. The term sheet looks good, so you sign it and pay a deposit. The lender takes the time to visit the property and completes their in-house valuation. But the value they come up with is way lower than you expected.

To make up for the difference, the lender will require you to bring additional cash to closing, or they will ask you to pledge one of your other properties as collateral. The lender likely knows which of your other properties has sufficient equity, and they may just want to take a 2nd lien on one or more of them to strengthen their position.

This is a great strategy for the lender, but what if you’re not OK with putting a 2nd lien on your other property. By this time, you’ve already spent money and several days working with the lender. You have to make a tough decision of whether to just move forward with pledging the additional collateral, or start from scratch with another lender that will require you to pay a few thousand dollars for a formal appraisal that may possibly come in closer to the value you were expecting.

So the point is: Don’t write off lenders that require a formal appraisal. Avoiding an appraisal may not be the best decision.

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How to Find Lenders That Don’t Require Appraisals

You can find direct private/hard money lenders right here on our website, and we have a filter you can use to locate lenders that never require a formal appraisal.

1. Start at the Commercial Bridge Lenders page
2. Type in a state or major metro area, and click SEARCH
3. Click REFINE RESULTS in the Filters section
4. Click SHOW ADVANCED FILTERS
5. Look for the Appraisal for Commercial field, and select Never
6. Click APPLY
7. View each lender’s profile to learn about their guidelines, background and more
8. Click the green CONTACT button and reach out to the lender directly

What is Covered Land?
Covered land is a commercial property that has an existing structure on it which will be redeveloped into a different property in the near future. The property types are primarily multifamily, office, retail, and industrial, but hotels and other specialty property types are frequently re-purposed and redeveloped as well. Here are a few examples:

• Old shopping center will be redeveloped into apartments
• Motel will be taken down to build a new office building
• Uninhabitable apartment complex will be redeveloped into a mixed-use property
• Car wash will be redeveloped into a single-tenant retail property
• Auto dealership to be redeveloped into an industrial distribution center

Covered Land deals are not always re-purposed. It could be an old building redeveloped into a newer building in the same asset class. Whatever the case is, a short-term bridge loan can be used by commercial real estate investors to acquire covered land or refinance their existing mortgage during the pre-development phase.

Here are 3 scenarios in which an investor or developer could use a bridge loan for covered land deals: 

• The property investor is purchasing covered land and plans to get it entitled within 1 to 2 years and then sell the project. The bridge loan would be used to finance the acquisition which will be paid off with a sale of the entitled project to a developer.
• The Investor already owns the property, wants to develop it, and needs to cash out equity which will be used for pre-development soft costs. A bridge lender would provide a short-term refinance loan which will be refinanced by construction loan.
• The property investor is a developer who wants to purchase covered land which is already entitled, but not shovel-ready. The bridge loan would be used to finance the acquisition which will be paid off with a new construction loan once the project has building permits.

It may be possible to get financing for the land purchase and the vertical construction from the same private lender, but only a small percentage of private bridge lenders provide ground-up construction loans. And not all of them will consider funding the covered land purchase. Some only provide funding when the project is shovel-ready. So the property investor typically has to get 2 separate loans – one of the covered land pre-development, and another for the vertical construction.

Maximum Leverage for Covered Land

The maximum loan-to-value or loan-to-purchase price for covered land typically ranges from 50% to 65% of the as-is value.

It varies based on the location and the development stage. If the project is entitled and located in a primary urban market, you may be able to get up to 65% LTV. For unentitled projects, some lenders will still go up to 65% if it’s in a prime location. And the lender will determine the leverage based on the as-is value, not the future value of the project once it’s built.

Covered land is still essentially land, and it could be a risky loan for any private lender, so most lenders will be conservative when it comes to leverage. The key element for lenders considering covered land loans is the exit strategy. Whether the plan is to pay off the bridge loan with a sale, or a construction loan, the lender has to feel confident in the ability for the project to get entitled or approved.

Interest Rates for Covered Land Bridge Loans

The interest rates for covered land typically range from 8% to 10%, but it could go up to 12%. As with leverage, the pricing too varies based on location and development stage, plus the investors experience and financials could be a factor. And all lenders charge origination fees which typically range from 1 to 3 points.

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How to Find Bridge Lenders for Covered Land Deals

You can find direct CRE bridge lenders right here on our website.

1. Start at the Commercial Bridge Lenders page
2. Type in a state or major metro area, and click SEARCH
3. Click REFINE RESULTS in the Filters section
4. Look for the Property Type field, and select Covered Land (or Commercial Land)
5. View each lender’s profile to learn about their guidelines, background and more
6. Click the green CONTACT button and reach out to the lender directly

This topic is only relevant to short-term bridge loans with a minimum loan amount of $1,000,000. There may be some lenders out there that will consider a payment rate structure for residential investment properties, but we’ve only seen it offered for commercial properties, including multifamily, office, retail and industrial.

If you get a short-term bridge loan for a commercial property purchase or refinance, your interest rate will likely range from 8% to 10%, and you’d have to make monthly interest payments during the loan term. But with a pay rate structure, the private lender would allow you to pay a lower interest payment during the loan term, and the remainder would be due when you pay off the loan.

Example Pay Rate Scenario

If your bridge loan amount is $4,800,000 and the interest rate is 10%, your monthly payment would be $40,000. With a pay rate option, the interest may be cut down to 5% during the loan term, so your monthly payment would be $20,000. The $20,000 per month difference would be deferred to when you pay off the loan by refinancing or selling the property. With or without the pay rate, the total interest due for the 12-month term is $480,000.

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Not having to make those extra monthly payments during the loan term could be a huge benefit for the property investor. The pay rate option is mostly beneficial in cases where the property’s income is not enough to service the debt.

It could be a property which has significant vacancy, but the plan is to lease up and then refinance with a long-term conventional loan. Or if your commercial property is vacant and not generating any income at all, but it’s on the market for sale.

Even if the property generates more than enough cash to service the high debt payments, most property investors would likely prefer to reduce the monthly interest payments and keep the extra cash on hand.

The pay rate is not always half of the total interest rate. There is no set standard in the industry. Every lender that offers the pay rate structure will have a minimum amount of interest they have to collect during the loan term.

Although most CRE bridge loans range from 8 to 10 percent, we’ve seen a number of lenders go down to 6 or 7 percent. However, you likely won’t find a lender offering the pay rate option when the total interest rate is less than 8 percent.

Here are a few sample structures for a $4,800,000 loan amount with a 12-month loan term:

• 10% Interest Rate = $480,000
  • 6.5% Pay Rate = $312,000
  • Monthly Payments: $26,000 instead of $40,000
  • $168,000 due at loan payoff
• 9% Interest Rate = $432,000
  • 6% Pay Rate = $288,000
  • Monthly Payments: $24,000 instead of $36,000
  • $144,000 due at loan payoff
• 8.5% Interest Rate = $408,000
  • 5% Pay Rate = $240,000
  • Monthly Payments: $20,000 instead of $34,000
  • $168,000 due at loan payoff
• 8% Interest Rate – $384,000
  • 4.5% Pay Rate = $216,000
  • Monthly Payments: $18,000 instead of $32,000
  • $168,000 due at loan payoff

In addition to the interest rate, all lenders charge an origination fee which typically ranges from one to two and a half points. The maximum loan-to-value for most bridge loans is 70% for a purchase and 65% for a refinance. The maximum term is typically twelve months, but it could go up to twenty four months.

Why Most Lenders Don’t Offer Pay Rate

The pay rate option in commercial real estate bridge lending is extremely rare. A very small number of lenders in the United States will consider it. Although it’s a great offering which could help lenders win more deals, it may not be possible due to the lender’s capital structure.

Most bridge lenders manage a private mortgage fund capitalized by many investors who expect to receive a monthly distribution. If most of the loans in the fund’s portfolio were pay rate structures, the monthly distributions would not be steady, and it just wouldn’t make sense for the investors because a consistent return is one of the main reasons people invest in mortgage funds.

Bridge lenders who don’t manage a fund are likely funding the loan from their balance sheet and then selling to the secondary market. It’s highly unlikely that any loan buyer would consider buying a loan with deferred interest payments, unless they are buying at a steep discount.

So there are only 2 capital scenarios in which a pay rate structure is possible for a lender to offer. Either they lend their own cash and don’t use any external capital sources, or the lender is backed by investors who don’t need consistent monthly income from the loans they fund.

This mainly includes family offices and ultra high net worth investors. For these types of capital providers, the trade-off to taking a lower monthly  interest payment is having their money parked in very conservative loans, secured by prime commercial properties, located in primary urban markets.

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How to Find Lenders That Offer Pay Rate

You can find direct private/hard money lenders right here on our website, and we have a filter you can use to find lenders that offer the pay rate structure.

1. Start at the Commercial Bridge Lenders page
2. Type in a state or major metro area, and click SEARCH
3. Click REFINE RESULTS in the Filters section
4. Click SHOW ADVANCED FILTERS
5. Look for the Payment Structure field, and select Payment Rate
6. Click APPLY
7. View each lender’s profile to learn about their guidelines, background and more
8. Click the green CONTACT button and reach out to the lender directly