Bubble fears prompt growth in nontraditional CRE financing

Business experts have noticed that commercial property developers in Illinois and around the country have begun to turn to private lenders like real estate investment trusts and hedge funds because stricter underwriting standards have made traditional financing packages more difficult to obtain. The Office of the Comptroller of the Currency has asked banks to be more thorough when issuing commercial property loans to protect the economy from another financial meltdown. This has opened the door for non-traditional lenders who do not operate under the same constraints.

Companies like the Blackstone Group and Starwood Property Trust do not accept money from depositors, which means they are not bound by the same lending regulations as traditional banks, but they may charge far higher rates of interest and sometimes require developers to pay significant fees upfront in return for their greater flexibility and fast turnaround times. While Main Street banks may be less willing to fund risky commercial developments directly, they still provide the lion's share of the funds that hedge funds and REITs make available to developers.

The commercial property market has largely recovered from the setbacks it suffered in 2008 and 2009, but concerns about overbuilding and a glut of empty space began to grow in late 2015. During the fourth quarter of 2015, more than $41 billion was made available to commercial developers by nontraditional lenders. This represents a 23 percent increase over figures from the same period in 2014.

Loans that do not have to meet strict underwriting standards may be easier and faster to obtain, but they could also contain provisions that make delays and missed deadlines extremely costly. Attorneys with real estate experience may help developers avoid delays by anticipating the permit, zoning or other regulatory problems that could crop up during such deals.

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