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A participation loan allows multiple lenders to participate, share in, and fund a loan. Typically with a participation loan, an originating lender will underwrite and close the loan and then sell parts of that loan to other lenders. This can be done simultaneously as the underwriting and closing process or after its initial completion. Additionally, all participants become the official owner of their portion of the loan and consequently incur all benefits and risks associated with the loan in question. During this process, a loan participation agreement is written and agreed upon between all involved financial institutions.
Because multiple lenders fund participation loans, they are beneficial for commercial real estate. This value comes from the various benefits that participation loans can offer for commercial real estate projects. Keep reading to learn how participation loans can benefit commercial real estate with larger loan amounts, lower risk and more.
The main benefit of using a participation loan in commercial real estate is their ability to enable financial institutions to increase their purchasing power. A participation loan allows a financial institution to originate large loans that they may not have had the ability to fund otherwise. This is beneficial for large commercial real estate purchases such as hotels, office buildings, apartment complexes, or assisted living properties.
With conventional loans, a single lender is less likely to fund expensive commercial real estate. With a participation loan, multiple lenders can join together to fund the real estate.
A participation loan in real estate also enables financial institutions to reduce their credit risk because multiple lenders are associated with the loan. Due to this reduced risk, participation loans allow for a lower interest rate charged to the borrowers by the lenders. Moreover, selling loan participation means a financial institution can reduce its credit risk to a customer that may entail greater risk than average.
With decreased risk also comes the sharing of profits. Any financial institution that participates in a loan participation benefits from sharing the lead financial institution’s profits. This is very advantageous for less established lending institutions that perhaps don’t generate much lending income on their own, or when the market is particularly slow.
By selling a participation loan, the lead financial institution can maintain important customer relationships instead of losing that customer to competing banks or sharing their loyalties. The leading financial institution in a participation loan may not fund a substantial loan themselves but simultaneously does not wish to lose their customer’s loyalty. By initiating a participation loan, they can both fund the loan and keep that all-important relationship with their client.
A participation loan in real estate also enables banks to diversify their assets better. Financial institutions can invest in several different participation loans in other locales. This further reduces the risk of overall loss because even significant events are unlikely to impact the entire financial institution’s portfolio. After investing in a few participation loans, financial institutions are likely to add more to maintain their portfolio’s integrity.
A well-managed participation loan can be extremely beneficial to both financial institutions and borrowers, particularly in the world of commercial real estate. They enable financial institutions to benefit from shared profits, reduced losses, and maintenance of customer relationships that may otherwise have been lost.
If you’re interested in commercial real estate investment of any type, including participation loans, Extensia Financial can assist you with your project. Our company can negotiate flexible terms and competitive interest rates, helping you diversify your lending portfolio. Extensia Financial has been in business since 1998, meaning Extensia has the knowledge and connections to facilitate participation lending in a stress-free manner successfully. To learn more about our services and how Extensia Financial can help you, contact us today.