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Private funds step in as banks tighten CRE lending

Commercial real estate investors in California and across the U.S. are starting to rely more heavily on private lenders as large banks tighten their lending standards. Banks have been less willing to lend money for commercial real estate deals due to increased scrutiny from banking regulators. Since 2015, the Office of the Comptroller of the Currency and the Federal Reserve have been warning banks about a potential bubble in real estate.

Private funds, sometimes referred to as 'shadow banks," have been agreeing to finance billions of dollars in real estate deals that big banks won't take a chance on. Real estate investment trusts, hedge funds and buyout firms usually charge higher interest rates for their loans, but they are able to issue loans much faster than banks. Real estate debt investment by private funds went up by nearly 40 percent from July 2015 to July 2016.

While banks have been warned that loose lending standards could lead to a market collapse, private lenders do not face the same kinds of lending issues. The CEO of RXR Realty, a firm that controls around $15 billion in East Coast real estate, said that there is not a risk of a systemic failure when private capital is being used to fund a real estate deal. Currently, so-called shadow banks own $32 billion in commercial property debt.

Private funds may be able to help commercial real estate investors finance lucrative deals. However, an investor may want to be cautious about taking out a loan from a private fund because the terms of the loan may not be ideal. An attorney might be able to help a commercial real estate investor obtain financing and negotiate loan terms.

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Creative Solutions for Complex Legal Issues

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