Commercial Real Estate Debt Funds – In the United States, commercial real estate loans maturing in 2023 and 2024 are about $900 billion. Against a backdrop of high borrowing costs, falling prices and increasingly risk-averse behavior in traditional funding sources, these mortgages are maturing in a tight capital market environment and may face some refinancing challenges.

Commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs) and investor-based lenders are behind more than half of the nearly $400 billion in loans maturing in 2023, according to our analysis. CMBS lenders are the single largest source, accounting for more than one-third of outstanding debt. Bank loans maturing this year (issued by international, national, and regional/local banks) are just short of CMBS.

Commercial Real Estate Debt Funds

The combination of new sources over the past decade sheds light on the wave of CMBS maturities. In 2013 and 2014, this group originated more loans than any other lender, accounting for more than a quarter of all loans. By 2016, other groups—mainly banks—had expanded their lending into commercial real estate, and CMBS lenders’ market share had nearly halved.

Commercial Real Estate Debt

In the later years of the maturity schedule, a shift in origination patterns occurs when banks dominate the share of maturing loans. Bank lenders are more than 50% delinquent in 2026 and 2027. A loan is a loan or any source of credit used to finance a commercial real estate investment. Commercial real estate investments often involve a combination of debt and equity, which make up the real estate capital stock. Sponsors often borrow loans (also known as collateral) from banks to acquire real estate and finance business projects.

In fact, there are different types of loans with different characteristics available to sponsors of real estate transactions.

The most common type of real estate loan is a senior loan, whose collateral – or security – is the primary lien on the real estate and which has a higher repayment priority than possible additional financing of the transaction. Sponsors can use senior debt to acquire or develop real estate.

A mezzanine loan is a type of loan that is subordinated to the senior loan, meaning that its debt service payments are received only after the senior loan is paid off. Commercial real estate sponsors obtain mezzanine loans when they want to leverage the property by increasing the proceeds of the borrowed loan to invest less equity.

Four Quadrant Model Real Estate Explained

Another type of financing that can be used in commercial real estate deals with preferred debt and equity is preferred stock, which is often thought of as a combination of debt and equity.

Preference shareholders are paid a fixed income for a specified period. Unlike mezzanine debt, senior equity is not secured by underlying assets. Instead, preferred shareholders can take control, ownership and control of the underlying real estate entity away from common shareholders in the event of certain defaults. Preferred capital carries less risk than common equity because it has priority in repayment and potential repayment in case of default. However, preferred stock takes priority over senior debt and mezzanine debt rights.

Depending on the life cycle of the commercial real estate transaction or the investment strategy (which can be core, core-plus, opportunistic and value-added), various loan products are available.

As the name suggests, construction financing is a loan product used to construct or significantly rehabilitate commercial property. Construction financing is typically short-term, one to three years, and its proceeds are intended to cover the design, labor and material costs of developing the property. It can also be used to purchase raw land. Although the loan is secured through real estate, the risk is higher if the project gets delayed or disrupted and thus construction loans carry higher interest rates than loans taken to acquire an already constructed property.

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Construction loans are financed by lotteries, where the lender releases funds as the project progresses. A construction lender may require that the business’s equity capital be financed prior to loan financing. Construction loans typically have an interest-only loan service fee, meaning no principal is paid before the loan’s due date. This reduces the amount of money needed for debt service and allows sponsors to focus available resources on project completion and asset stabilization.

A bridging loan is another short-term loan product, and as the name suggests, its purpose is to bridge the gap between the acquisition or reinvestment of real estate over a period of time when the property can secure a long-term loan. The term of a bridging loan is usually two to three years, which gives the financier time to improve the asset’s performance or increase operational efficiency.

When the business plan is implemented and the real estate is established (ie a normal occupancy rate is reached), the financier can sell the real estate or replace the bridging loan with permanent financing. Interest rates on bridging loans are generally lower than construction loans, but higher than permanent loans given the transitional nature of the underlying property. Bridge loans can be structured as senior loans or mezzanine loans. Like construction loans, bridging loans typically have an interest-only loan service fee.

A permanent loan is usually obtained in connection with real estate stabilization and is a type of loan that replaces a construction or bridging loan. A permanent loan is usually a preferred loan with a low interest rate and a loan tenure of 5-10 years. These loans are inherently low risk as they are backed by fully developed and established assets. Mezzanine financing can also provide a permanent right secured by an established property. These mezzanine loans are generally considered less risky than mezzanine loans behind construction or bridging loans because they are backed by established assets.

Commercial Real Estate Lending Climbs Above Pre Pandemic Levels

When looking for real estate investments, many focus only on stock investments. However, debt is another way for investors to gain a foothold in commercial real estate. Although equity investments generally offer higher potential returns than debt investments, this sometimes comes at the cost of increased risk. Certain debt products, such as mezzanine loans for fully developed and established assets, can offer investors attractive risk-adjusted returns given their protected position in capital stock. years and increased its commitment to the industry by establishing a 50:50 joint venture with leading real estate credit manager Boss Capital (Boss Credit) in 2021.

Boss has a wealth of history and expertise in providing credit facilities to borrowers secured against property, usually with a premium (ie first mortgage security). These real estate developments exist in various sectors and locations and offer investors attractive, risk-adjusted returns as they form the basis of our Commercial Real Estate Loan (CRED) Fund.

An unlisted, open-ended real estate debt fund offered exclusively to wholesale investors with the objective of offering attractive investor returns and protection against vulnerability. Minimum investment is $100,000

Watch Boss Credit’s four-part Street CRED video series with AusBiz host Andrew Geoghegan, where we walk you through commercial real estate debt (CRED) investments that invest in short-duration positions and enable high risk-adjusted returns.

Invesco Launches A Private, Accredited Investor Debt Fund For Commercial Real Estate Assets

Every effort has been made to ensure that the information provided is accurate (as of August 2022) and is the opinion of Bassi’s partner Yehuda Gottlieb. The information is subject to change without notice and we make no guarantees as to the accuracy, reliability or completeness of the information in this series. This video series is not and should not be considered an offer to invest in Bass Investment Vehicles (Funds). Investing involves risks, including the risk of losing some or all of your investment.

Currently, the unlisted commercial real estate debt fund market is focused on senior loans as the big banks tighten their lending rules. Senior loans are repaid first when the loan matures or when the loan is executed with the last grace period. Therefore, senior bonds are considered less risky and their yields are lower.

From the borrower’s point of view, these types of loans are more common and are often called non-bank loans. Currently, Australia’s four major banks dominate all loans with a market share of more than 75 percent

1. Australian Government Productivity Commission on Competition in the Australian Financial System, Productivity Commission Inquiry Report Overview and Recommendations (No 89, 29 June 2018).

Commercial Real Estate Loans

2. Bank and non-bank lending over the past 70 years, according to quarterly data from the US Federal Deposit Insurance Corporation (FDIC), Figure 1

Want to be the first to learn about our commercial real estate loan investment opportunities? Note that you must qualify as a wholesale investor to invest in one

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