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Commercial property developers turning to private lenders

On Behalf of | Sep 28, 2016 | Commercial Real Estate |

Real estate developers in California and around the country are finding it increasingly difficult to secure the funds they need to keep their commercial projects on track. Obtaining bank financing for commercial property was generally a fairly straightforward process throughout most of 2015, but things became a lot more difficult for developers during the fourth quarter after the Office of the Comptroller of the Currency issued a stern warning about lax underwriting standards.

The OCC warning came as growth in the commercial property market began to slow and a developing glut of unoccupied office space raised fears of another bubble. When traditional banks are reluctant to make loans, private lenders often become more active, and the amount of private money funding commercial real estate developments has increased by about 40 percent since Main Street banks started taking a more conservative approach.

Private lenders like hedge funds and real estate investment trusts are not bound by the same underwriting rules as banks because they do not accept public deposits, but their increased flexibility and responsiveness often comes at the cost of higher interest rates and fees. Private loans also tend to have shorter terms than conventional real estate financing packages, which provides developers with even more of an incentive to keep their projects under budget and on schedule.

For developers, completing projects in a timely manner often makes the difference between paying off a short-term loan with little difficulty and being forced to refinance at exorbitant rates of interest. Delays can be ruinously expensive in real estate, and many of them are caused by zoning, permit or regulatory issues. Experienced real estate attorneys will likely understand the importance of keeping commercial projects moving, and they may be able to suggest steps that developers can take to avoid common pitfalls.