Crowdsourced Debt Grows as Option for Small Properties

As commercial banks cut back, crowdsourcing is playing a growing role in small-balance lending.

moneyMarketplace lenders that use capital from accredited individuals are a growing option for owners of small commercial properties, according to Moody’s Investors Service.

Although volume is relatively small and debt providers don’t carry the visibility of companies that crowdsource equity transactions, marketplace lending “comprises a small but growing slice of the overall commercial real estate finance market,” Moody’s said in a recent report.

No estimates are readily available, but the market is believed to total upwards of $1 billion, which is a fraction of the $2-plus trillion commercial mortgage market. However, the marketplace lending sector is likely to increase its market share over time. “Like Internet shopping, it will grow rapidly off a small base,” said Tad Philipp, director of commercial real estate research at Moody’s and co-author of the report.

Marketplace lending platforms started operating about a decade ago, but gained momentum in 2013 following passage of Title II of the Jumpstart Our Businesses Startups (JOBS) Act, which allowed businesses to publicly solicit investments from accredited investors or individuals that meet prescribed levels of income and net worth.

Moody’s noted that marketplace lenders that offer commercial property loans include Money360, Patch of Land, RealtyMogul, RealtyShare and Sharestates. Their lending guidelines call for proceeds ranging from as little as $100,000 to more than $10 million, with the bulk of deals involving loans of between $1 million and $5 million.

So far, the bulk of crowdsourced lending is made in the consumer and business sectors, in part because of the complications of originating commercial mortgages, which involve a heavy amount of underwriting and processing relative to the fees collected for a small-balance loan. Still, Moody’s believes that marketplace lenders will find a niche for loans of less than $5 million, in part because there is less competition in that arena from traditional loan sources.

Only 6.3 percent of CMBS loans are $5 million or less and only 21 percent are less than $10 million. Insurance companies typically focus on larger, high-quality loans. The government-sponsored enterprises Fannie Mae and Freddie Mac have started small-balance loan programs in recent years, but they remain small and apply only to multifamily properties. Local and regional commercial banks are the biggest provider of small-balance loans, but regulatory pressures have led some to cut back on lending in the commercial segment. The bottom line is that marketplace lenders have a niche in which to operate, but it will require them to be efficient and competitive.

“We anticipate that the adoption of MPL in commercial real estate finance will continue to lag that of the consumer and small-business finance sectors because CRE loans are typically larger, are more document intensive and are generally not as well suited to credit assessments, based largely on statistical credit scoring,” the Moody’s report said.

Performance of marketplace loans is another question, though the market is too young to have much data on performance. Moody’s notes that there could be a negative credit effect in that borrowers who rely on marketplace loans might have weaker balance sheets than those that rely on more traditional and cheaper sources of financing. Other concerns cited by the agency include that marketplace lenders could spur an increase in development by unsophisticated builders and the general lack of oversight by regulators.

“The growth and evolution of CRE MPL bears watching because commercial real estate lending, like most credit markets, is an ecosystem in which the activities of new entrants can affect the programs and performance of current participants,” the report said.