Private Versus Institutional Finance

The question often arises as to why borrowers would borrow private money on real estate transactions at significantly higher pricing than via banks or other institutions.

The general (and inaccurate) assumption is that these are always high-risk ventures and the borrowers do not have the creditworthiness that would allow them to borrow from regular and conventional sources.

Private money is actually used by a wide range of borrowers, including high net worth individuals, sophisticated real estate developers and investors, all of whom are genuinely aware (and not just hopeful) of an asset value, and who prefer the simplicity of using this more flexible market. They are not just credit challenged applicants who have limited choices, though of course these will be considered as well depending on the security.

There are in fact a wide variety of factors that determine whether or not a borrower would be a candidate for private money:

Quick Funding of a Time Sensitive Loan

Banks and conventional financial institutions normally take longer than private money lenders to close a loan due to strict regulatory oversight.

Reduction of Red Tape and Paperwork Hassles

Traditional lenders require substantially more documentation than private lenders, have more stringent committee processes, and may generally cause more processing time when time is of the essence.

Flexibility and Creative Problem Solving

Private money lenders are more creative in complex loan situations. A property may have an issue that makes it difficult for conventional lenders to finance.

Nature of the Loan and Market Conditions

Prevailing market conditions, asset or location concentration may cause conventional ultra-conservatism, extra processing time or provision of more security than necessary, to take away an applicant’s ability to marshal resources as required. PMCS on the other hand will assess the property or project’s risk as a clean canvas, determine where it sits on the risk curve and price it accordingly. In essence, private loans are equity based and the most important component of the loan is the evaluation of the real estate. A borrower’s past history and level of commitment plays a part in the determination of viability, but it is not the “apex” factor.

Reduction of Equity Participation

Borrowers may also consider using PMCS for a portion of the traditional equity component of a project – “skin in the game”, “hurt money”. Equity investors will generally require a “preferred” position (e.g. Redeemable Preference Share, which looks like equity but behaves like debt) and coupon rate in addition to profit share. It all depends on the deal.

Borrower circumstances

Again, these are not just limited to credit problems, including past bankruptcy as is usually assumed. There may be tax liens or other credit lines required repayment. Neither determination to stave off insolvency, nor an actual receivership or liquidation is necessarily a deterrent for us. The property may be part of a divorce negotiation or other family matter.