Alternative Sources of Finance for Real Estate Developers

Alternative Sources of Finance for Real Estate Developers

Do you need alternative sources of finance for your real estate development?

You may feel that alternative finance for your real estate development would be a good idea for a number of reasons. These reasons revolve around the limitations of conventional financing and the advantages of alternative funding options. Consider the following.

There are all sorts of reasons why you may find yourself wanting to seek out alternative finance for your real estate development. Conventional financing does, of course, present its own limitations, and there are distinct advantages in seeking alternatives.

You may well find that the approval process is unjustifiably time consuming. Of course, this can be annoying and can even be disruptive when your plans are composed of several stages which need to follow each other in sequence. Conventional finance is extremely time consuming when compare with the alternatives.

The long term nature of conventional financing will tend to trap you into a situation which prohibits the early closure of the loan, and enforces this will prepayment penalties (depending on the remaining term the loan has to run, these prepayments may well be up to five years’ worth of interest payments). Alternative financing, by contrast, presents you with no such penalties, mainly due to their short-term attributes.

You will find that the various alternative means of financing are considerably more flexible, their lending sources much more accommodating and sympathetic to individual needs. The terms and conditions will be much more versatile.

With alternative financing you’ll find a greater Loan-to-Value (LTV) ratio than with conventional sources, which will generally not exceed 70 percent. Going the conventional route means that you’ll have to find more of your own money for what you need. Alternative financing will provide an LTV ratio of 80 percent.

What are the Best Sources of Alternative Financing for my Real Estate Development?

The real estate financing sector has seen a recent boom in alternative financing, with a number of reputable lending platforms now available. You will want to consider the following when searching for a lending source which is trustworthy. These include the following:

1. Successful track record. You should always take a close look at how long the lender has been trading. You should also check out their success rate in financing new contracts. Due diligence requires that you scrutinize these things in a volatile market; unreliable sources will not have the staying power that you should look out for.
2. Management and Staff are experienced. You can be sure that, if their key people are experienced, this is a good indicator of both their trustworthiness and their reliability.
3. Loan Underwriting requirements. You should have a look at these closely: what sort of a review procedure do they have? Is it their custom to check things like zoning laws, architectural plans, project timelines and budgetary constraints? Do they understand the demographics of a given market? Each lending platform has their own set of requirements, and you need to be sure of these.
4. Borrower Assessment. Alternative finance sources will have borrower assessment practices which are just as robust as their conventional peers.
5. Quick turnaround.  You really need your source of financing to offer a quick turnaround time for a number of reasons.

Should You Seek a Bridge Loan at any Point in your Development?

Bridge loans can be very useful at the outset of any real estate plan. These can be taken out when you expect more substantial funds later but you need to make a start sooner rather than later. If you have capital tied up somewhere else then a bridge loan is also a useful option to have. Short term bridge loans are available from several online sources.

Should I Consider a Hard Money Loan for my Real Estate Development Business?

By all means. Hard money loans can provide funding which conventional lenders cannot. Real estate proposals often have assets which are not attractive to conventional lenders, although interest rates on hard loans are generally much higher than with conventional sources. Hard money loans can be used to begin the work; when sufficient work has been done to make this viable enough for conventional lenders, you can then leave the hard money loan.

What are Mezzanine Loans:  Where Do I Find Mezzanine Loan Sources?

Mezzanine loans comprise loans and equity-based finance combined. You give the lender the rights to your business equity, to be exercised only if you default on payments. Mezzanine loan sources will generally seek high value borrowers with good assets. Traditional lenders such as banks can provide such funding as well as alternative lending platforms.

How Should I Prepare to Apply for Alternative Financing?

Here are some of the requirements you should consider when looking at alternative finance.

1. Have the Correct Documents. The proper documentation is required for alternative financing. You should have the right deeds of ownership, proof of liquidity and balance sheets.
2. Quality of Your People. Alternative financing sources will want to have confidence in the quality of your key personnel. This also shows your own commitment to your development idea and will inspire confidence in all stakeholders concerned.
3. Present A Pitch Deck. It will help your position if you have a face-to-face presentation in which you could pitch your idea to the prospective lending source. Such an approach will make your proposal seem more achievable and inspire greater confidence.
4. Having A Plan. Similarly, you will do well do have a renovation plan as well as an exit strategy in place when applying for funding.

Are There Any Disadvantages in Conventional Commercial Real Estate Finance?

Conventional real estate financing is highly regulated. You should bear in mind that there are considerable disadvantages in conventional real estate finance.

This includes the fact that it must fully conform to all the High Volatility Commercial Real Estate (HVCRE) regulations. In practice this means that only larger corporations with deeper pockets are accepted. Conventional commercial real estate lending sources will always favor these large firms and do not take kindly to smaller, less well established participants.

The time it takes to get approval can be lengthy, and the necessary documentation is strictly observed. You should also note that the maximum LTV ratio is usually pegged at 70 percent.