Sourcing debt is usually a separate and parallel process to sourcing equity as debt capital providers are typically different from equity capital providers.

While having debt in place can make raising equity easier, specific terms of the debt including cost, guarantees, default provisions, may be of concern to some equity providers (having the whole equity stack in place usually makes raising debt easier as well).  So Sam is going to run both processes in parallel.

There are many types of debt and debt providers Sam can explore when seeking a loan for Washington Place, as approximately 60% of all CRE debt is held by non-bank lenders.

Commercial Banks

• Description: Traditional financial institutions that offer a wide range of banking services, including real estate loans.
• Loan Types: Commercial mortgages, construction loans, permanent loans, and lines of credit.
• Characteristics: Often provide competitive rates and terms but may have stringent qualification requirements and longer approval processes.

Private Lenders

• Description: Individuals or private entities that provide real estate financing outside traditional banking institutions.
• Loan Types: Short-term loans, hard money loans, mezzanine loans and bridge loans.
• Characteristics: Generally more flexible with loan terms and underwriting criteria, but often at higher interest rates due to increased risk.

Hard Money Lenders

• Description: Private lenders who provide short-term, high-interest loans secured by real estate.
• Loan Types: Fix-and-flip loans, bridge loans, and loans for distressed properties.
• Characteristics: Fast approval and funding, but higher interest rates and fees. Typically used for short-term projects or when traditional financing is unavailable.

Commercial Mortgage-Backed Securities (CMBS) Lenders

• Description: Lenders that issue securities backed by pools of commercial mortgages.
• Loan Types: Long-term commercial mortgages.
• Characteristics: Often used for large-scale commercial real estate transactions, with loans securitized and sold to investors.

Development and Construction Lenders

• Description: Lenders specializing in providing financing for real estate development and construction projects.
• Loan Types: Construction loans, development loans, and land acquisition loans.
• Characteristics: Typically provide short-term, interest-only financing during the construction phase with funding disbursed in stages.

Institutional Investors

• Description: Large entities such as pension funds, insurance companies, and investment firms that provide substantial financing for real estate.
• Loan Types: Large-scale commercial mortgages, construction loans, and development financing.
• Characteristics: Often provide significant capital with favorable terms but may have more stringent requirements and longer approval processes.

As Sam will learn, each type of lender has its unique advantages and limitations, and the choice of lender will depend on the specific needs of the real estate project, including the type of property, the stage of the project, and the borrower’s financial profile.

Choosing the right lender for your deal

Choosing the right debt and lender for Washington Place will depend on market realities and individual project requirements. But the first step in the decision making process is to determine the ideal long term capital structure/stack for the project:

• Equity
• Pref equity
• Subordinated debt
• Senior debt

If necessary, there may be interim financing for some projects before Sam gets to the permanent capital stack goal via construction loans, land loans, and/or bridge loans for projects while they stabilize or get to a position to obtain lower cost permanent debt.

Once Sam determines the right kind of debt needed (and decides he’s not using a debt broker), he’ll need to identify a group of leading lenders that provide the type of debt he’s seeking.  Then he’ll build a project deck and send it to multiple lenders with the goal of creating a competitive process and optimize terms and make negotiations easier.

In this chapter we’ll also break down the key terms of a debt term sheet, discussing Sam’s negotiating process in detail with different types of lenders.

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