Michael Ciaburri, Worth Avenue Capital, LLCThere are four distinct types of private “Hard Money” lenders that operate in the marketplace. All of these lenders secure their loans with mortgages on various types of real estate. Only one of the four categories of lenders specializes in High Touch Private Lending. These four types of lenders are the following:
Very large well capitalized lenders with a national footprint. Their underwriting criteria is focused on making private loans to borrowers who own real estate in specific asset classes and qualify for loan approvals in which certain mathematical formulas are met including Loan To Value Ratios (LTV) in the 50% to 60% range. These asset classes include office, industrial, retail, multifamily, hotel, land, and mixed use properties.
Midsize lenders who are also well capitalized with more of a regional footprint.
Their underwriting criteria is very similar to their larger competitors but with slightly more flexibility in terms of asset class and LTV’s depending upon the location of the property and the “Exit Strategy” of the loan repayment. This type of lender may be apt to lend on an asset class that a larger lender might not. For example, this type of lender might make a loan on a restaurant property even though the risk that is associated with this type of property is considered to be higher than the previously mentioned asset classes.
Small “boutique” lenders with smaller capital bases who operate with more of a local footprint. These companies specialize in “High Touch” lending practices with greater flexibility than the larger and midsized private lenders. Specifically, this type of lender is lending to a smaller entity and takes more of a concerted interest in the underlying business operation. Although high touch lenders also have specific loan underwriting criteria, they bring more of a personal touch aspect to the lending process and they take the necessary time to get to know the principals who will personally guarantee the credit facility.
Crowd funders are the latest and most recent entry into the private lending space.
This online lending platform is characterized by the fact loan requests are funded by a plethora of accredited investors who can lend as little as a few thousand dollars of their own money towards the funding of a specific loan. Crowd funding continues to grow rapidly in the marketplace as evidenced by annual loan originations of approximately $1 Billion of which 30% of these loans are Commercial Real Estate based.
All four categories of private lenders fulfill a specific niche in the marketplace with corresponding market shares. The category however of private lender that best fits the smaller borrower and provides them with the most “value added” and personal service is the third category of “High Touch Private Lenders”. Since every private loan request has a “story” behind it, the majority of the smaller borrowers still enjoy being able to speak with a lender “one on one” so that they can better explain their circumstances to a lender. Larger and midsize lenders are typically not community driven and are more volume oriented in terms of deals closed. Hence, they do not want to spend the time dealing with the “minutiae”that accompanies a smaller loan request. Online lenders use a virtual lending platform so they have no personal contact with a prospective borrower. As such, it is the boutique “high touch” lender who best fills the personalized service void for smaller borrowers in assisting them with their debt capital requirements.
As a former president & CEO of a community bank, I have a great deal of experience in handling smaller commercial loan requests that require one’s undivided and personal attention. In the private lending sector, my company, WAC, has undertaken a similar business model to that of a community bank by which we make a concerted effort through listening harder to make a personal connection to our prospective borrowers. By undertaking the route of a high touch boutique lender in the marketplace, WAC has developed and maintained a niche that services the smaller borrower and delivers the personal attention that differentiates us from our competition.
The four different categories that exist in the private lending marketplace all have a distinct business model that provides a variety of choices for those entities in the real estate industry who are seeking financing. Although all four of these categories contains lenders who operate with a specific niche, it is category #3 that is comprised of “High Touch” private lenders who specialize in providing the smaller borrower with personalized service. High touch private lenders are adept at deciphering the needs of this type of borrower and executing a private loan that best fits the needs of the borrower in a timely and personal setting. The absence of this type of private lender in the marketplace would ensure that the art of high touch private lending would be lost.
Michael Ciaburri is principal at Worth Avenue Capital, LLC, Guilford, Conn.