How Life Company Money Stacks Up

Commercial real estate loans funded by life insurance companies are some of the most advantageous you can find for both large and small commercial real estate investments, offering some of the lowest interest rates and best terms against comparable options. They’re often accompanied by flexible terms to fit the specific needs of the borrower, and they can span anywhere from 5 to 30 (and in some cases 40) years.

These loans are funded through life insurance companies, known as “life company money.” Life insurance companies take customer premiums and on average reinvest one third of them into commercial real estate ventures. Since life companies are interested in long-term investments,
this allows life companies to offer long-term fixed-rate loans with rates that are more competitively priced than those from conduit lenders or major banks.

How life company money stacks up

Flexible & predictable terms

Life companies collect premiums over decades, so they make stable, long-term investments. Because of this timeframe, they’re often willing to make fixed-rate loans up to 30 or 40 years and are more interested in predictable income than immediate returns.

As an investor, the stability of knowing what to expect for the term of your loan is a distinct strategic advantage. Loans can also be made with flexible terms, depending on the borrower’s unique circumstances. The loan structure can be designed around your needs as a borrower.

Depending on how the loan is structured, it may balloon at the end of the term, meaning the loan balance will be refinanced or paid off when it ends. Otherwise, the loan may be planned as self-amortizing, where the loan will be fully paid off as it matures.

Prepayment penalty structures

Most life company loans have a lock-out clause for the first half of the loan term, or a prohibition against prepayment. For the remainder of the loan, most loans have a prepayment penalty where the borrower is required to purchase treasury bills and bonds that provide the lender with the same payments as the original loan. However, these penalties can be steep, so be aware of these restrictions before borrowing life company money.

Non-Recourse options

Life insurance loans fall into one of three categories: non-recourse, limited recourse, or full recourse.

In a non-recourse loan, borrowers are not personally liable for the repayment of the loan and the repayment is solely from the collateralized property and its cash flows–the sole source of repayment in the event of default or foreclosure

Limited recourse loans give the borrower a percentage responsibility for any shortfall between the loan balance and the sales price of the property in the event of a default or foreclosure.

In contrast, full recourse means the borrow is fully responsible for all shortfalls in the circumstance of a default or foreclosure, as well as any applicable legal and ancillary fees.

Loan assumption

The majority of life insurance loans are assumable, which usually comes into play when the collateral property is sold before the term of the loan. When the borrower wants to sell the commercial real estate that’s securing the loan and the purchaser of the property wants to take over, the purchaser both becomes the owner of the property and is responsible for the original terms of the loan. The original borrower is then released from the obligation to the original loan.

This structure is beneficial to the original borrower because it allows them to avoid prepayment costs, plus it gives the buyer the opportunity to assume the loan that may have more favorable terms than the market can offer at the time of the sale, which is especially beneficial in high interest-rate or tight-credit markets.

Loan servicing

Loans are typically serviced by one of three sources: the funding institution, the originator of the loan, or a third-party servicer. The primary servicer is responsible for the day-to-day loan practices, including:

• Collecting payments
• Managing escrow accounts
• Analyzing financial statements
• Inspecting collateral
• Reviewing borrower consent requests

In the case of non-performing mortgages, loans are sent to a special servicer, who is responsible for duties such as:

• Extending loan maturity dates
• Restructuring loans
• Appointing receivers
• Foreclosing interest in a secured property
• Managing foreclosed real estate
• Selling the real estate

At PSRS, we service about $5.5 billion in loans. We stay close to the lending process in order to ensure the best service not only through the loan closing, but also for the term of the loan itself. That’s why many of our clients have called us again after several years for assistance on lease approvals, releasing parcels from their loan’s collateral, and more.

We make sure our clients are well taken care of through the life of their loan by leaning on long-standing insurance company relationships—the strongest backbone to PSRS that allows us to ensure our clients’ care on a daily basis, as well as their long-term stability.

Is this type of loan is right for me?

If you’re interested in a commercial loan financed by life company money, consider the following guidelines typically used to determine whether or not it’s right for you:

• Your investment property must typically be multifamily, office, retail, or industrial
• The property must be new or pristine condition
• The property should be in a primary location, typically a gateway city in terms of traffic count, accessibility, and neighborhood affluence (and rarely in a city with fewer than 200,000 residents)
• The loan amount typically exceeds $5 million (smaller deals may run closer to $3 million, but are more unique circumstances, usually by a strong or national credit tenant)
• The loan should stick to a 55% to 58% loan-to-value ratio, where the property is purchased with a large down payment

These loans are best suited for transactions with strong borrowers and good credit. Borrowers should expect to invest cash equity in their projects while maintaining post-closing liquidity.

Prior commercial real estate ownership experience is also highly desirable by lenders and can be an advantage when determining the terms of the loan.

Get started with PSRS

Founded in 1972, Pacific Southwest Realty Services (PSRS) is one of the largest privately held commercial mortgage banking firms in the western United States. Our funding sources include major life insurance companies, banks, credit companies, CMBS, and institutional investors.

Access to diverse capital sources ensures a high level of success in arranging commercial real estate loans, apartment loans, mezzanine loans, and equity transactions taht our clients have come to expect. Our long-term lending relationships give us greater latitude in solving problems and closing loans in a timely manner. After the loan funds, our experienced in-house servicing team handles many issues, including assumptions, lease approvals, payoffs, insurance, and many other similar matters.

Contact PSRS today to discuss your lending options.