As published in Scotsman Guide's Commercial Edition, July 2005.
Since the bursting of the tech-stock bubble and the continuing less-than-spectacular returns from the stock market, many investors have sought better yields elsewhere. In fact, many of these investors have turned to commercial real estate, making it one of the hottest investment opportunities today.
The result has been a surge of investors trying their hand for the first time in what can be a perplexing industry, especially when it comes to commercial-real-estate financing. The commercial- mortgage industry is replete with a dizzying array of financing alternatives that can be overwhelming to newcomers and veterans. It is equally challenging to understand the relationship of who’s involved, the difference between real-estate loans and business loans and how loans are determined.
Multiple institutions participate in the commercial-mortgage community. They include portfolio lenders (pension-fund advisers, life-insurance companies and commercial banks), Wall Street conduits (commercial-mortgage-backed security, or CMBS, issuers), agencies (Fannie Mae, Freddie Mac and the Federal Housing Administration) and mortgage-banking institutions, for multifamily apartments.
Unlike single life companies or conduits, which only offer their source of funds, a mortgage-banking firm offers a variety of programs. These programs can include several life-insurance companies, conduits and agency programs. The result is a more-favorable deal for the borrower because one lender is pitted against another.
Commercial-real-estate lenders judge the quality of a property by two basic criteria: 1. many different tenants can use the property; and 2. the property can be leased or managed by different owners. These criteria reduce a lender’s risk associated with any single tenant or manager.
The property types that owners and lenders seek most frequently include apartment complexes, retail centers, office buildings, industrial properties, hospitality (hotels and motels), self-storage facilities, manufactured-housing communities, and health-care and related properties (assisted living and senior housing).
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