Creative financing can provide capital for property in transition
June 27, 2008 | Mid Atlantic Real Estate Journal
Traditionally, creative financing has been synonymous with buying property with no money down. Today, creative financing has evolved into finding options and solutions for borrowers that don?t fit into the mainstream. Unlike traditional financing, creative financing can help a person or business with collateral gaps, credit gaps or working capital needs to get loans without the involvement of a conventional lending institution. Due to the mortgage meltdown, institutional underwriting restrictions have gotten tighter making it virtually impossible to obtain funding for most real estate opportunities. As a result, prospective borrowers are turning to private money lenders as alternatives to conventional financing.
Private money loans are typically asset-based and have a short time-frame for closing and with flexible repayment plans making them ideal for loans on real estate that is in transition and therefore, does not yet qualify for traditional financing. Transitional loans are Thomas OBryon loans that range from under construction, in need of rehab or unrented buildings in areas that take longer to lease up.
Private money lending institutions, which are often backed by an investor mortgage pool, can make their own credit decisions giving them the freedom to structure creative financing to find solutions for borrowers. In addition, as asset-based lenders, the primary source of repayment is from the sale or later refinance of the property after it has been improved. Banks are unwilling to make loans of this nature but the private mortgage lender, working closely with the borrower can find solutions in order to make these loans. The credit capacity of the borrower is secondary. Private money lenders don?t need to follow set guidelines when it comes to negotiating loan terms and conditions. This gives them the flexibility to think out of the box and create real estate loans using any combination of terms and conditions. These loans can be structured to address virtually every combination of opportunity and circumstance ranging from opportunistic purchases, construction takeouts and rehabilitations to lease ups, repositioning, and partner buyouts. Let me present an example of a Creative Financing Solution that Wilshire Finance Partners is in the process of closing:
Commercial property owner Bob has an Office Building in Riverside County where lease up is going slowly. The financing that Bob had previously set up was based on the building being 80% leased at the time of the permanent take out. Unfortunately the building is only 60% leased so the bank declined to make the take out loan. Bob came to Wilshire Finance Partners to see if he could get a take out for his now defaulted construction loan. Wilshire Finance Partners worked with the 1st lien holder and purchased a 50% interest in the construction loan, added $50,000 in interest reserves for Bob and extended the loan for 12 Months. The bank now has a performing loan, WFP has a performing loan and Bob has time to get the building leased and performing for a permanent commercial loan. Creative financing has numerous benefits but the most important is that it enables borrowers to leverage their assets so they can efficiently and expeditiously complete a project while giving them time to secure long-term loans from traditional lenders.
Thomas OBryon, CEO of Wilshire Finance Partners, has over thirty years of experience in the real estate industry, specializing in the private money mortgage business.
