A10 CAPITAL'S HARD MONEY LOANS |
A10 Capital funds hard money loans to allow its customers to capitalize on unique commercial real estate opportunities. As a private portfolio lender, A10 Capital has the expertise and capability to creatively structure and quickly close commercial mortgage transactions typically avoided by conventional commercial mortgage lenders. For more information on A10 Capital’s hard money loan program, click here or call us today at 877.577.5055. The following information describes hard money loans generally as well as the hard money lending industry.
WHAT IS A HARD MONEY LOAN? |
A hard money loan is a specific type of asset-based financing in which a borrower obtains loan funds based on the value of a parcel of commercial real estate securing the hard money loan. Hard money loans are typically issued at higher interest rates than conventional commercial mortgages and are almost never originated by a commercial bank or other deposit institution (see discussion below). Hard money loans are similar to bridge loans and usually demonstrate similar underwriting criteria and cost of funds characteristics. However, while a bridge loan refers to a commercial real estate property or investment property that may be in transition and not yet qualified for traditional financing, a hard money loan takes the status of the loan characteristics one step further in that it most often refers to not only a loan with a higher interest rate secured by a commercial mortgage but also a borrower with a distressed financial situation, such as arrears on the existing commercial mortgage, commencement of foreclosure proceedings and/or a borrower who has filed (or been forced to file) bankruptcy.
Many hard money commercial mortgages are made by private investors, generally in their local market areas. The credit characteristics of the borrower are not as important for a hard money loan since the loan amount is based on the value of the commercial real estate covered by the commercial mortgage securing such hard money loan. Typically, the maximum loan to value ratio for a hard money loan is 65-70%. This low LTV provides additional security for the hard money lender, in case the borrower does not repay and the hard money lender has to foreclose under its commercial mortgage on the property.
HISTORY OF HARD MONEY LOANS |
According to Wikipedia, “hard money” is a term used almost exclusively in the United States and Canada where these types of loans are most common. Hard money loans developed in the commercial real estate industry as an alternative "last resort" for property owners seeking capital against the value of their commercial real property holdings. The hard money industry began in the late 1950s when the credit industry in the United States underwent drastic changes.
The hard money industry suffered severe setbacks during the real estate crashes of the early 1980s and early 1990s, when lenders overestimated and funded properties at well over market value. Since that time, lower LTV rates have been the norm for hard money lenders seeking to protect themselves against the market's volatility. Today, high interest rates are the mark of hard money loans as a way to compensate hard money lenders for the higher risk that they undertake; however, the customer benefits in that the hard money loan steps in and provides cash at a crucial point in a commercial real estate project, allowing the customer to retain its interest in the project without being forced to seek an equity partner (thereby losing future profits) or, in a worst case scenario where credit issues have come into play, losing the project and the customer’s current equity investment entirely.
HARD MONEY LOAN STRUCTURE |
A hard money loan is a type of commercial mortgage loan collateralized against the quick-sale value of the commercial real estate property for which the loan is made. Most hard money lenders fund in the first lien position, e.g., in the event of a default, the hard money lender is the first creditor to receive remuneration upon foreclosure of the commercial mortgage and subsequent quick-sale of the real estate. Occasionally, a hard money lender will subordinate to another first lien position loan; this hard money loan is known as a mezzanine loan or second lien.
Hard money lenders structure loans based on a percentage of the quick-sale value of the subject commercial real estate property that will secure the hard money loan. The LTV ratio for a hard money loan typically hovers between 60-70% of the current value of the commercial real estate property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a hard money lender could reasonably expect to realize from the sale of the commercial real estate property in the event that the hard money loan defaults and the hard money lender must foreclose under the commercial mortgage and sell the collateral in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.
Below is an example of how a commercial real estate purchase might be structured by a hard money lender:
65% Hard Money Loan
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| 20% Borrower equity (cash or equity in additional real estate provided as collateral for the hard money loan) |
| 15% Seller carryback loan or other subordinated (mezzanine) loan |
CROSS COLLATERALIZING A HARD MONEY LOAN |
In some cases, the low LTV does not facilitate a hard money loan sufficient to pay off the existing commercial mortgage lender. As an alternative to a potential shortage of equity beneath the minimum hard money lender LTV guidelines, many hard money lenders will take a "cross lien" on another of the borrower’s properties. The cross collateralization of more than one property on a hard money loan transaction is also referred to as a "blanket mortgage".
Most banks do not offer commercial mortgage hard money loans because they typically do not fit the bank’s lending criteria due to the speculative nature of the property, the higher level of risk, lack of full documentation, and other factors. A bank that originated hard money loans might have difficulty justifying its lending practices to its investors and government regulators. Hard money loans are, therefore, more likely to come from individuals, investment pools, and businesses that make a practice of providing hard money loans and who have expertise to complete the hard money transaction in a manner that meets the needs of the customer.
HARD MONEY LOAN RATES AND BENEFITS TO CUSTOMERS |
To compensate the hard money lender for the higher risk, hard money loans typically have higher interest rates and points. The benefit to a customer to pay the higher rate associated with the hard money loan is to avoid imminent foreclosure or a "quick sale" of the property that could result in as much as a 30% or more discount that is common on short sales. By taking a short term bridge loan or hard money loan, the borrower often preserves its equity and extends its time to get its affairs in order to better manage and maximize the long-term value and profitability of the property. Interest rates on hard money loans range from 10%-18%, and points are traditionally 1-3 points higher than a traditional commercial mortgage lender.
IN WHAT SCENARIOS CAN A HARD MONEY LOAN BENEFIT ME? |
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A hard money loan is often used to finance a commercial real estate property that is being foreclosed on by a conventional commercial mortgage lender. |
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A hard money loan is often used to finance a property being acquired at a foreclosure auction since the purchaser often has only 14-28 days to complete the transaction. |
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A hard money loan may be used to acquire bank REO property that a conventional mortgage lender may be unwilling to finance due to the stigma associated with the subject commercial real estate property. |
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