Alternative financing solutions rely on different policies, practices, and procedures for the wealthy and for average people. They aim to solve problems for both groups by combining low-cost loans with generous rewards.
These solutions can be as straightforward as a newly created credit line at a bank or credit union, or as complicated as a loan through a credit scoring system like CART or SIVUS, but with the added benefit of an equity release.
The release of equity gives someone who would not ordinarily qualify for a conventional loan an opportunity to enter into business or property ownership. It also increases the value of property and business assets when they are sold or transferred.
When combined with other measures like public funding or tax credits, these releases can change the trajectory of an individual or business, making them highly valuable to society.
This discussion will focus on ways alternative financing systems create opportunities for individuals and businesses.
Commercial real estate loans
The market for commercial real estate loans has expanded greatly in the past year. This is due in part to increased demand from investors and developers looking to capitalize on new regulations and opportunities.
New regulations Boost Demand for Commercial Real Estate Loans
Since March 2017, when Congress passed the landmark Tax Cuts and ImmoPrivate Placement Regulations, there has been a tremendous increase in interest from both private equity firms and banks in obtaining a loan for a large business purchase.
These firms and banks are looking at large businesses that may have cash available immediately after the purchase, an ability to finance the purchase with a short-term loan, low or no debt service requirements on the new acquisition, and no current owner overlords needing to agree to merge before taking over the business.
These new owners will need a loan to cover their takeover cost and eventual repayment, which is why interest in alternative financing solutions is high today.
Examples of creative financing
There are several ways to create a financing solution for your commercial real estate project. These include:
– Partner with an outside credit union to qualify your property for funds,
– Use a collateralized loan arrangement (CLA), where a portion of the purchase price is used to cover loans on the property, and others collect interest on the balance of the purchase price, which is then used to cover loans on the property, or
– Use a mortgage as the only form of debt financing. Both conventional and underwater mortgages can be utilized in this fashion.
Closing a loan can be difficult when there are multiple parties involved. A common fix is to use collaborative lending, where multiple parties work together to qualify buyers for properties and combine their skills to create a product that meets all parties needs. This can save both time and money on each individual lender.
Combining two loans into one larger loan
A combined loan is a great solution for the needs of both the borrower and the lender. The borrower can take out all of the initial loan amount, which is secured by the property, and use it to make payments on the property.
The lender can combine two loans into one larger loan with a lower balance on it. The combined loan can be issued in multiple formats such as a credit line or new mortgage.
The benefits of a combined loan include: faster processing, better interest rates for both loans, and more options for gift giving gifts. Financial institutions usually combine loans to save on processing fees which increases funding options available.
There are several ways to get your combined loan balanced out.
Extended repayment schedule
A lengthened repayment schedule provides additional time to save money for the borrower. It allows the borrower to continue to repay the loan while it takes advantage of additional investment from the lender.
This is possible by providing a longer-term loan with a lower interest rate. The extended-period loan has a longer grace period before lenders assess creditworthiness, so it appears more favorable than a shorter-period loan at initial approval.
If the borrower can make timely payments, the lender can charge less interest on the extended period loan. If borrowers cannot make timely payments, their interest rate can be higher because of reduced forgiveness.
In most cases, only one bank or credit union may offer an alternate financing solution for a property. Only when all parties agree to use this alternative financing process does it become creative financing.
Debt restructuring
Refinancing your property loans is the default method for obtaining alternative financing. Most lenders would like to refinance your existing loans but cannot without proof of the loan balance, credit score, and if the property has been outstanding for a period of time prior to application.
If you do not have a recent clean credit card bill or low balance on your loan documents, then you will not have access to this option. Many lenders will only offer this to people with very poor credit ratings, which is why it is called alternative financing.
If your debts can be transferred from another lender into an alternative debt consolidation loan from a new lender, this may be more cost-effective than refinanced debt.
You will need to prove your income and willingness to make payments in order to get access to this option.
Capital injections
A term used when a lender is given money to invest by another party. When a loan is granted, the investor gains ownership of the property but doesn’t get to make any changes to it.
This process is called capital injections or investing in the property. It’s very common and can be helpful if the owner isn’t interested in making changes to the property or if they are not ready to sell it yet.
It is usually done on larger properties, so there may be more opportunities for investors. Smaller properties may not have enough funds available to invest them, so nothing happens.
Some lenders are willing to help out other holders of a property. If you need help applying for capital injections, look for an alternative way of getting involved in the market.
Breakdown of commercial real estate loans
A commercial real estate loan is typically obtained through a bank or loan lender. However, instead of a traditional mortgage backed by properties as property is valued at price to pay off the loan, an alternative lending solution such as a collateralized debt obligation (CDO) or structured finance loan.
The structure of the CDO or structured finance loan allows for loans to be made based on property value, not actual rent paid. As a result, the majority of the money left over after interest and principal payments are taken out goes into property management and operational costs.
This is an effective way to support commercial real estate because property value increases when business grows, and operating costs increase with no increase in revenue. Without credit concerns and strong corporate governance, organized crime can step in and take advantage of these loans.
Therefore, organized crime uses vacant buildings as their headquarters, allowing only for minimal security to prevent fraud. Once inside, they take advantage of these loans by underpaying rent so they can operate in the building without having to worry about paying back the debt.
Benefits of alternative lending for commercial real estate investors
Alternative financing includes collateralized loan agreements (or collateralized loans in the terminology of alternative financing), credit loans, and mortgage loans.
Collateralized loan agreements (CLAs) allow investors to borrow money as an agent for a specific amount of property. The investor hosts the property and handles all correspondence with lenders, but they retain full ownership of the property until it is sold or transferred.
Credit cards offer potential lenders easy access to credit, making them more likely to approve a property than a traditional bank would be. Because of this alternative financing can be very beneficial when seeking out new properties and/or repaying old properties.
When using alternative lending sources it is important to know your rights and obligations. Check with your organization to see if these rules apply for you.
