In the last few months we have seem a resurgence of new investment firms. Thanks to the Job Training ACT of 2012. After approval there were certain procedures which had to be negotiated. Most of these were opposed by an assortment of banks and investment bankers. In the end, the S.E.C. approved it with some reservations, but intact. It’s goal is to provide capital to real estate and businesses to jump-start the main street economy. In that year span, and continuing today, banks and investment firms are at best, cherry picking low hanging fruit loan, opportunities in prime recovering major markets, passing on properties which are in the gray area, location wise, or with financial hiccups. Some banks are still awash in poorly originated mortgages, with under water value, and stressed borrowers.
Despite the previous down turn, most of these Job Training Act 2012 506 C offerings are either “blue sky” investments. Providing no assets, no collateral, no current cash flow, These rely on outrageous pricing, assume discount buying of assets, and of course, promising an exceptional yield. It’s the Wimpy character, from the Popeye cartoons, “please lend me money for a hamburger today, and I’ll pay you Tuesday”. Not a good recipe for investors, or the borrower, for that matter. What is startling, is the fact that there are great commercial loans without a home! Possibly even more amazing, there are investors which have the ability to invest. Investors tired of stock market inconsistency, and poor yields for bonds and C.D.’s! In the old days we bartered every thing. Even is the 1930’s cash was a scarce commodity. This was done personally, a dozen eggs for a sack of potato’s. In the next economy we are progressing to a personal stake in lending and borrowing. How do we make it work now?
First of all, one of the fantasy of lending, usually promoted by loan brokers, there is not a loan for every borrower! That panacea resulted in the last catastrophe. However, value is value. Value tends to re-assert itself over time. Even in period of financial difficulty, many based on factors which beset the whole country and the world, can be overlooked, as can property value at a certain point in time. In a contrary view-point, If it was valuable, it will be again! Remember $300.00 gold? We will need collateral. In the synergy of promoting these investments, the collateral in a commercial loan is the real estate. Loan to value will be negotiated to an acceptable level. A safe value. Business cash flow is just as crucial. Collateral never made a payment. With Capacity of the business, can it expand? grow both in product and management. These are the three “legs” of the stool to place an investment upon. Not all “legs” need to be level! Over compensation in one area with help the cause as a whole. Credit is suspect qualifier. I do not believe I ever had any debtor who wouldn’t pay his note if he had the money! But that is different story.
How does this work if you are seeking a loan? In this case find a private investment advisor you are comfortable with. Ironically, many of the financial titans who opposed the Act of 2012 Jobs, originally, are now active participants! A private investment firm will review your business, advise what their investors will expect. If agreeable terms are reached, an application will be drawn in detail to spell out the terms of what you are applying for. This used to be a term sheet, or commitment, now an application with terms and conditions. There will be processing, possibly some regulatory notification, title, on site visit, and appraisal requirements. It might take 6 to 8 weeks to settle.
What expect. Interest rate between 1.5% to 2.5%+ over the C.D. rates for a comparable term. Amortization can be interest only up to 3 years, term can be 1 year up to 30 years. Most loans are limited liability to the borrower, will have bankruptcy remote status, prohibition of other debt with out pre-authorization, and are all first lien position. There are closing costs, determined at approval, most are paid at settlement.
In the “new” world of lending, the market maker in commercial real estate might be your neighbor, or several neighbors, resulting in an expansion of capital for American businesses.