Many commercial mortgage borrowers, due to the greater realities of the market, are finding that the there only viable option is a commercial hard money loan. The terms are often surprisingly expensive for borrowers that are use to typical bank loans.
For example, market right now for commercial hard money is 12% – 16% interest only with 3% – 10% points on the front of the loan… Borrowers use to 2% over Prime as their rate, with a 1% bank fee are again, often floored by these terms.
No one ever willingly chooses to go the commercial hard money route. Instead they do so out of necessity. Borrower elect to accept the term after they have done an exhaustive search for traditional loans and have found no takers. The decision is boils down to which is more expensive, paying the 6% points or losing the business/building and or both.
Unfortunately as the credit crisis deepens and the future of the commercial secondary market remains in doubt, borrowers have to face the reality that it may be 2 to 3 years before the markets return. For some they simply cannot wait that long and have to choice their best alternative.
On a more positive side, the loan terms are interest only which often means a lower payment for the borrower, than they currently have. Also, if the loan request is a debt consolidation deal, the borrower will often save, from a cash flow perspective, thousands of dollars per month by lengthen the amortization, putting them in a stronger position to restructure and buying them time.
Again, borrowers do not normally pick hard money as their first option. But instead realize that this may be in fact their best option due to the realities of their individual situation and the greater markets.