The Rise of Alternative Financing for Commercial Real Estate
Commercial real estate has long been the domain of a fairly narrow pool of investors and an even smaller pool of potential lenders. Because of the enormity and complexity of most commercial real estate deals in addition to the vast sums of money involved, there are few lenders willing to take on the risk and even fewer investors savvy enough to stand a good chance of making a significant profit.
Today, however, all of that is changing. As restrictions from big banks increase, there are fewer borrowers who qualify for commercial real estate (CRE) loans. The dearth of loans has led to rising interest rates and banks gaining more leverage to negotiate steeper terms. All of these conditions have created a prime market for alternative financing.
What is Alternative Financing?
Alternative financing is any type of financing that does not come from a large or traditional bank. Here are three types of alternative financing.
Large hedge funds, in particular, are primed for offering CRE loans. They not only have the financial resources to do so but are often set up to offer more competitive rates and terms than traditional banks. In 2017, private debt assets under management rose 6% over the previous year to $638 billion.
Small Banks and Credit Unions
Smaller banks and credit unions have traditionally not had the resources to offer such large loans without becoming overextended. Today, however, smaller banks and credit unions are starting to band together and pool their resources in order to be able to offer both CRE and SMB loans.
Pooling smaller sums of money together to create larger investment portfolios is nothing new, but today there are a growing number of ways to do so. Real estate investment trusts (REIT’s) are one way, of course, but some companies and businesses are even using platforms like Kickstarter or GoFundMe to raise money for projects like saving a local hangout or even creating more community resources. The Empire State building is currently in the process of being converted into shares available for purchase for as little as $100. This allows everyone to purchase a small piece of American history, while still keeping the building in the hands of private investors.