What should I look for when choosing a private money lender for a commercial real estate deal?

For a commercial real estate private-money lender, I’d evaluate the lender on two separate dimensions: (1) whether the economics actually work for your deal, and (2) whether the lender is credible and will actually perform when you need the money.

1. Look beyond the headline interest rate

Compare the all-in cost of capital, including:

• Interest rate and whether it is fixed or floating
• Origination/points
• Exit fee or payoff fee
• Extension fees
• Underwriting/admin/documentation fees
• Legal fees and whether you pay the lender's counsel
• Default interest and late fees
• Prepayment penalties
• Required reserves or interest reserves
• Construction draw fees, if applicable

A 10% loan with 1 point can potentially be cheaper than an 8.5% loan loaded with fees and a large exit fee. The term sheet should spell out the economics, but remember that a term sheet is often non-binding and terms can change during underwriting.Brookmont Capital Ventures+1

2. Understand exactly how much they'll fund

Ask:

• Maximum LTV based on current value?
• Maximum LTC based on total project cost?
• Will they fund acquisition only, or also renovation/construction?
• Are interest and closing costs included in the loan amount?
• Are future advances committed or discretionary?
• What happens if the appraisal comes in below your purchase price?
• What happens if construction costs increase?

For development or value-add deals, this is particularly important. A lender that says "$5 million loan" but ultimately funds only against completed work may leave you with a significant equity gap.

3. Scrutinize the guaranty

This can be more important than a small difference in interest rate.

Determine whether the loan is:

• Non-recourse
• Full recourse
• Limited recourse
• Subject to a bad-boy guaranty
• Personally guaranteed
• Cross-collateralized with other properties

Ask the lender to identify every circumstance that can turn limited recourse into full personal liability.

4. Examine the default provisions carefully

This is where an apparently attractive private loan can become extremely expensive.

Look at:

• Default interest rate
• Grace periods
• Monetary vs. non-monetary defaults
• Cure periods
• Cross-default provisions
• Whether a technical covenant violation triggers default
• Lender's ability to accelerate the entire loan
• Receiver/foreclosure rights
• Whether the lender can take control of rents or accounts
• Extension rights and conditions

Have a real-estate attorney review the loan documents before signing—not merely the term sheet.

5. Make sure the lender has actually closed similar deals

Ask for specific references from recent borrowers, ideally involving:

• The same property type
• Similar loan size
• Similar leverage
• Similar geography
• Similar business plan

Ask those borrowers:

Did the lender fund when promised? Did the lender retrade the deal after you spent money on diligence? Were draws timely? How did they behave when something went wrong? What unexpected fees or conditions appeared at closing? This can reveal much more than a lender's marketing materials.

6. Verify the lender and its funding source

Find out who actually has the money.

Is your counterparty:

• Lending its own balance sheet?
• A private fund?
• A family office?
• Syndicating the loan?
• Acting as a broker/originator who still has to find the capital?

You want clarity about whether the person giving you the term sheet has authority and committed capital to close.

Also verify the lender's legal entity, track record, litigation/public-record history where appropriate, and applicable state licensing/regulatory requirements. The regulatory framework can differ substantially depending on the borrower, property, loan structure, and jurisdiction.

7. Pay close attention to the lender's closing conditions

Ask for a preliminary list of conditions precedent to funding.

Commercial lenders commonly require items such as appraisal, title, survey, environmental reports, insurance, leases, financial information and organizational documents. Federal banking guidance likewise emphasizes property, financial, title, environmental and borrower due diligence in CRE lending.OCC+1

The important question is:

Are the conditions objective and achievable, or can the lender effectively decide at the last minute whether it wants to fund?

For example, compare:

"Funding subject to lender's satisfaction with the appraisal." with something more objective such as:

"Appraisal must demonstrate an as-is value of at least $X." The latter gives you substantially more certainty.

8. Understand draw mechanics

For construction/value-add deals, ask:

• How quickly are draws processed?
• Who inspects the work?
• What documentation is required?
• Is there a minimum draw?
• Are retainages imposed?
• Can the lender stop future advances?
• What happens if the project goes over budget?
• Is there a construction contingency?
• Are unused loan proceeds available for other approved costs?

A lender can have excellent pricing but still be a poor fit if its draw process doesn't match your construction schedule.

9. Examine the maturity and extension provisions

Don't just look at the stated term.

If the loan is 12 months, ask:

"What exactly has to happen for me to obtain a 6-month extension?"

Look for:

• Extension fee
• Minimum principal paydown
• Updated appraisal
• Updated financial statements
• No-default requirement
• Minimum DSCR/LTV
• Lender discretion
• Notice deadline

An extension that exists only "at lender's option" isn't the same thing as a contractual extension right.

10. Check whether the lender understands your business plan

A good private lender should be able to explain why the deal works and how it gets repaid.

Your exit might be:

• Sale
• Permanent financing
• Refinance
• Stabilization and cash-out
• Asset sale after redevelopment

Make sure the lender's underwriting assumptions aren't fundamentally inconsistent with your plan. CRE underwriting commonly focuses on property cash flow, leverage, borrower financial strength and stress testing.Federal Reserve

A simple lender-comparison worksheet

I'd put competing lenders into a spreadsheet with these columns:

Then calculate the actual dollar cost of the loan through your expected exit, rather than comparing rates alone.

The biggest red flags

I'd be particularly cautious if you encounter:

• Pressure to wire a large "commitment fee" immediately
• Vague answers about where the loan proceeds come from
• Refusal to provide a meaningful term sheet
• Significant lender discretion hidden in the documents
• Terms that materially change after you've spent money on diligence
• Unusually broad personal guarantees
• Very aggressive default/foreclosure provisions
• No verifiable history of closing comparable loans
• References you cannot independently verify
• A lender who won't let your attorney review the documents

And never rely solely on the lender's attorney to explain what you're signing.

If you tell me the property type, purchase price/value, requested loan amount, expected term, and whether it's acquisition, refinance, construction, or value-add, I can give you a much more specific private-lender due-diligence checklist and term-sheet comparison framework for that type of CRE deal.

• Sale
• Permanent financing
• Refinance
• Stabilization and cash-out
• Asset sale after redevelopment

Make sure the lender's underwriting assumptions aren't fundamentally inconsistent with your plan. CRE underwriting commonly focuses on property cash flow, leverage, borrower financial strength and stress testing.

A simple lender-comparison worksheet

I'd put competing lenders into a spreadsheet with these columns:

For example, compare:

"Funding subject to lender's satisfaction with the appraisal." with something more objective such as: