Private and bridge lenders serve an important role in the commercial mortgage marketplace. They provide real estate investors and property owners with much-needed financing to help restore properties to stabilized condition, or to allow for cash-out financing. However, these sources typically provide only short-term financing at above-market rates, as private lenders seek to turn over their capital quickly to help finance the next deal.

Unless the property is sold, most borrowers need conventional financing once the property has stabilized. As a mortgage originator, you are in the best position to help your borrower plan their next step and obtain conventional financing once the bridge loan matures. Better yet, with the right partnerships, you can earn fees on both loans, help your client succeed, and build on the relationship for the long term.

One option is to consider an often-overlooked partnership opportunity: credit unions.

Yes, credit unions!

Not Your Grandfather’s Credit Union

Credit unions have long been recognized for providing outstanding service. Decades ago, this meant offering savings accounts and personal loans, but little in the way of sophisticated banking products. Over time, credit unions have transformed into full-service financial institutions, and now meet all the personal financial needs of their members, from checking accounts to home banking, auto loans and home equity lines of credit. More recently, credit unions have entered the commercial and small-business lending arena, with a special focus on commercial real estate financing.

Credit unions vary greatly in asset size and lending capacity. While many target smaller borrowers within their local geographic markets, others can handle nationwide loan requests up to $50 million. By statute, federally chartered credit unions cannot charge prepayment penalties, and most offer attractive fixed rate terms of five, seven, or 10 years. Credit union loans typically feature 10-year maturities but can go up to a maximum of 15 years, with amortization schedules of anywhere from 15 to 30 years depending on the asset type and loan terms.   

The biggest difference between credit unions and other types of lenders, such as banks, is their cooperative, member-owned structure, and philosophy. Credit unions are individually chartered based on defined fields of membership. Prospective members must meet certain criteria, such as living or working within a specific geographic area, working for a certain employer, or belonging to a common group or affiliation. Not all credit unions face the same restrictions, however. Quite a few have more flexible field of membership requirements and can finance properties nationwide.  

Credit unions are all about the relationship. At most cooperatives, loan decisions are made locally, and borrowers enjoy direct access to their originating loan officer throughout the life of the loan. Although credit unions prefer to work directly with their members, many have established strong partnerships with third-parties such as commercial mortgage brokers. In the case of broker-originated deals, the broker represents the borrower during the underwriting process, which typically starts after a joint introduction among all the parties.

What Does Partnering with a Credit Union Look Like?

Typically, private and bridge lenders do not focus primarily on the capacity of the borrower. Rather, they provide asset-based financing. In contrast, credit unions are cash flow lenders and thus look to the borrowers’ and principals’ global cash flow positions as much as the value of the collateral.

Most credit unions require the full and unlimited personal guarantees of all principals with control over the borrowing entity, typically those owning 20% or more. Prior to 2017, recourse to at least 51% of the total ownership was required by regulation. Following recent regulatory changes, a limited number of credit unions will consider loans with less than full recourse for the very best-qualified credits in their market.

Typical credit union underwriting criteria include:

• Minimum debt coverage of 1.25 on gross lease properties (higher for double and triple-net lease properties, and non-recourse transactions);
• Maximum loan to value ratio of 75% (65% or less for limited and non-recourse transactions);
• Minimum occupancy of 90%; holdbacks allowed for minor repairs, replacements, and tenant improvements;
• Two years plus year-to-date operating statements;
• Current rent roll showing lease terms and expirations, plus copies of lease agreements for all tenants occupying at least 25% of the building;
• Borrower financial statements and personal financial statements of principal owners;
• Three years of tax returns for the borrower and all principals, for calculation of global cash flows;
• An appraisal is ordered after the borrower accepts the term sheet and pays the deposit;
• A Phase I environmental report/assessment is ordered for all purchase money loans and as needed on refinance loans;
• Some lenders require a property condition report; and
• Most credit unions require professional property management unless the borrower demonstrates a successful history of managing similar types and sizes of property.

Borrowers need your help in securing conventional, long-term financing on their commercial real estate projects. Credit unions are often overlooked, but an excellent option for take-out loans. Consider this resource the next time you help your property owners and investment real estate clients plan their exit strategy.