Commercial real estate investors have two distinct financing options: agency loans and non-agency loans.

While government entities back agency loans, private lenders provide non-agency loans. It is crucial for investors to understand the difference between these loan types when seeking financing for their ventures. This blog post will examine the characteristics of both agency and non-agency loans, highlight their unique features, and explain how they pertain to commercial real estate investing.

Agency Loans are Government-Backed Loans

It is a government agency that issues or guarantees agency loans, also known as a government loan. A few of these agencies are Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Veterans Administration (VA), and USDA. Although most agency loans focus on residential mortgages, some agencies, such as the Small Business Administration (SBA), offer commercial real estate loans as well.

Non-Agency Loan Financing Options

A non-agency loan, on the other hand, is not backed by the government and is provided by a private lender. Non-agency lenders include banks, credit unions and non-bank financial institutions. They offer more flexibility in terms of loan amounts, borrower qualifications and property types. Commercial real estate investors and projects can benefit from them.

What are the Differences?

Loan Guarantees and Backing:

In addition to providing lenders with additional security, agency loans are backed by government agencies. Inherently risky for lenders, non-agency loans lack government backing or guarantees.

Loan Amounts and Terms:

Government agencies typically set loan limits and terms for agency loans. Commercial real estate loans from non-agency lenders offer greater flexibility in loan amounts, terms, and repayment structures.

Recourse vs. Non-Recourse

The debt on a recourse loan holds the borrower personally liable for the debt, particularly in the event of a default.

Non-recourse debt is basically the opposite of recourse. On a non-recourse loan, the lender can not go after the borrower’s personal assets in the event that the collateral is not sufficient to cover the debt.

It is important to note that many traditional lenders do not offer non-recourse commercial real estate loans, but this does not mean that they are not available. It is also important to mention that non-recourse loans will typically require a lower LTV (loan-to-value) ratio, increased points, and a higher interest rate.

If you would like more information in regard to recourse vs. non-recourse lending, here is a great article you can check out on Investopedia.

Borrower profiles and eligibility criteria

Borrowers who qualify for agency loans may include first-time homebuyers, veterans, or people living in rural areas. Commercial real estate investors benefit from non-agency loans because they offer more flexibility in borrower qualifications.

Types of properties and investment strategies:

Although some agencies offer commercial loan programs for small businesses, most agency loans are for residential properties, including multifamily investment properties.

The types of properties covered by non-agency loans include office buildings, retail centers, industrial assets, and multifamily homes.

Fees and interest rates:

Due to the government’s backing, agency loans offer more competitive interest rates, but they may require additional fees and mortgage insurance.

A non-agency loan typically has a higher interest rate, but may have fewer fees and more flexible terms.

Process for documenting and approving:

As a result of government regulations, agency loans often have more standardized documentation and approval processes. That said, the benefits can far outweigh the addition underwriting and loan approval time.

There may be more varied documentation requirements and approval processes for non-agency loans.

Investing in commercial real estate

Investors should carefully consider agency and non-agency loans when considering commercial real estate investments:

Small businesses and investors in tertiary markets may find agency loans suitable, as well as residential investors in SFR and multifamily properties.

For investors engaged in a variety of commercial real estate projects, to include mutifamily; non-agency loans provide greater flexibility, customization, and suitability.

When selecting a loan, commercial real estate investors should consider factors such as loan eligibility, property type, loan terms, interest rates, fees, and borrower qualifications.

Investors can navigate the intricacies of financing programs with the help of a strong financial partner such as NNN Lease Advisor and MVRK Lending.

In Conclusion:

For commercial real estate investors, agency and non-agency loans offer distinct advantages and considerations. Agency loans offer stability, favorable terms and specific borrower eligibility – primarily for residential loans. In addition to flexibility and customization, non-agency loans cover a wider range of property types. Investment goals, property type, borrower profile, and risk tolerance all play a role in choosing the most appropriate loan option.

With NNN Lease Advisor, investors can make the best decisions to ensure their investment success by guiding them in the right direction. With access to so many lenders, investors will typically get between four and twelve lenders competing for their business.

Contact NNN Lease Advisor today to learn more about what options for financing or refinancing your commercial real estate investment.

About the Author:

Ric Del Vizo is a licensed commercial real estate broker, investor, and licensed mortgage broker offering Florida commercial real estate acquisitions and disposition services across the state, as well as commercial real estate financing options in all 50 states.