High yield lending 101: a primer on alternative financing - Focus on: Banking and Finance

High-yield lenders like SWH Funding Corp. of Hackensack, NJ, provide commercial mortgage loans when conventional financing is not an option. The following provides answers to commonly asked questions about high-yield lending and how companies like ours play a critical role among today's commercial mortgage lending sources.

Q. What is a high-yield commercial loan?

A. High-yield loans (or hard-money loans) are short-term bridge loans for acquisitions, refinancings, turnaround/work-out situations, foreclosures and bankruptcies. Interest rates are significantly higher than conventional loans, but less expensive than having a partner.

Q. What type of borrowers need high-yield financing?

A. High-yield loans are ideal for borrowers who are unable to obtain funding through a conventional source. Typically, they need the loan for opportunistic or problematic situations that require fast response and funding.

Q. Why is it so expensive?

A. SWH Funding clients pay for service. Our professionals can get through complicated loan requests quickly, often closing within a week or two after a conditional commitment is in place. Because the upside realized through our funding is so significant, the interest rate rarely becomes an issue for our clients, who understand the time "value of money" and that they are paying for a valuable service.

Q. What property types will SWH Funding consider?

A. SWH Funding will consider income-producing properties such as apartments, retail/shopping centers, office buildings, hotels/motels, mobile home parks and restaurants, as well as non-income producing investment properties such as raw land construction, rehab developments, land assemblage and condo/co-op conversions.

We analyze each transaction during the due diligence process for "good risk" - to be sure that a property can be repositioned for sale or refinancing.

Q. What property types will SWH Funding not consider?

A. SWH Funding will not finance houses of worship, gravel pits or casinos.

Q. What are the minimum and maximum loan amounts SWH Funding will consider?

A. Loans range from $2 million to $100 million.

Q. How fast can SWH Funding complete a transaction?

A. SWH Funding can offer conditional commitments in 24 to 48 hours, with loans closing a week or two to 30 days after that, following due diligence. We find that it is usually the borrower who controls the "pacing" of the dosing, provided our attorneys are given the proper documentation in a timely manner.

Q. If you have to do full due diligence, how can you get the loan closed so fast?

A. The nature of our business dictates that we must be able to expedite due diligence proceedings. Our staff works very quickly to make sure everything is in order for an expeditious closing.

Q. Why does SWH Funding only finance short-term loans?

A. Terms longer than two or three years simply become too expensive for our borrowers. Our goal is to have them in and out of the loan as quickly as possible.

Q. How much equity does a borrower need?

A. The amount of equity needed depends on the quality of the real estate. Typically, we prefer 10 to 25 percent equity.

Q. With such a high return, should SWH Funding be willing to take more risk?

A. Not necessarily. Taking more risk for a higher return is a concept based on residential loans. Because SWH Funding finances multi-millions of dollars per loan, our risk must be minimized. A borrower does not pay us for "risk", they pay us for service.

Q. Does SWH require personal guarantees?

A. Yes. We analyze the merits of a project in its entirety, in conjunction with the involvement, capabilities and character of the principals. Because we fund problematic and opportunistic projects, we need to be sure that the principals are totally committed.

Q. Does SWH Funding finance second mortgages, mezzanine loans or joint ventures?

A. Although it is not our regular business practice, we can finance these types of loans on a case-by-case basis.

Q. How about fees? Are there up-front or third party fees?

A. Clients pay a due diligence fee of .5 to 1 percent and closing fees of 4 to 8 percent. Broker/banker fees, third-party reports, the appraisal, and our attorney's fee are in addition to what we charge.

Q. Does SWH Funding protect bankers, brokers and intermediaries for their fees at closing?

A. Yes. However, we ask that they establish a fee agreement with the borrower in which the borrower commits to paying the agreed upon points at a closing (these points are in addition to those that we quote).

Q. What is the best way to submit a loan request?

A. Clients must complete a loan request summary, including a written narrative of "the story" of the loan request.

For information, contact Kevin Clark at (201) 343-3222, ext. 213, or visit our web site at www.swhfunding.com.

Kevin S. Clark, Director of Marketing and Origination, SWH Funding Corp.

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