Florida commercial real estate developers may have heard of hard money loans as an available option for securing project financing. They may not be aware of what these loans are or how they differ from more traditional types of financing for commercial real estate.
Hard money loans are high-risk, equity-based loans that are meant for investment and commercial properties that are not owner-occupied. Because they are equity-based, this means that credit qualifying is not needed. Borrowers are expected to put down the amount the lender requests in equity, which might be around 30 percent. Since the loans are high risk, this means that the upfront costs and the interest rates are both very high.
Hard money loans also have very short terms, normally lasting from one to three years. They are given by private financing groups rather than by banks or other traditional lenders. The loan amounts are based on what the lender believes the property could sell for in a few months if no improvements are completed rather than on the property's appraised value. This means that the loan amounts are generally around 50 to 70 percent of the appraised values.
If other financing sources are available, it is best to avoid hard money loans unless there are no other options. People who do receive a hard money loan might want to begin looking for other sources to refinance it as soon as possible. Developers who are having financial difficulties that are making it difficult for them to secure financing might want to consult with a real estate attorney to see if there are other alternatives that might be available.