Note Financing Lines of Credit: An Attractive Option for Private Real Estate Lenders
By Mark Roberts, National Sales Manager, and Lisa Alberti, Senior Vice President, of Western Alliance Bank Note Finance
In the continually evolving world of real estate finance, established private real estate lenders are turning to note financing lines of credit as an efficient tool to fund loan growth and maximize investor returns.
What is Note Financing?
Note financing is the process where a lender, typically a bank with a low cost of capital, provides financing to another lender, most often a private lender that can demand higher yields from its borrowers. The financing is collateralized by assignments of mortgage notes and deeds of trust.
The most common note financing structures are collateralized by:
1. A portfolio of loans under a revolving line of credit structure
2. Individual loans on a deal-by-deal basis (commonly referred to as “note-on-note”)
Who Is a Candidate for Note Financing?
As a financing tool, note finance can be a viable option for funds that lend to borrowers who own investment properties and seek short-term loans to acquire, renovate or reposition their properties. Borrowers may use the lines of credit for single-family home fix-and-flips, commercial real estate financing or ground-up construction.
Note financing revolving lines of credit are one component of our real estate warehouse lending business. Our expert bankers work to design note financing1 arrangements for private real estate lenders and buyers of performing and non-performing notes. These buyers may include private equity real estate funds, family offices and institutional investors.
About Note Financing for Loan Portfolios
Financing in the form of revolving lines of credit works best when the private lender is organized as a fund structure with all loans originated in the name of a single entity and managed as a portfolio. The loans, which can be secured by residential or commercial real estate collateral, generally work best for individual loan sizes under $20 million.
Lines of credit provide value by enabling lenders to fund very quickly, thereby aligning with their value proposition of speed and certainty of execution. Private lenders, often debt fund managers, frequently use lines of credit because they are a great tool for managing liquidity. Funds from the credit line can fund new loans and are paid down when loans pay off. As a result, investor cash can be fully invested at all times, earning the highest returns. The fund, in turn, benefits from better cash management and lower cost leverage.
About Note-on-Note Financing
Note-on-note financing may be an option for certain commercial real estate loans, typically over $20 million. In this structure, the individual loan is underwritten with the analysis focused on the specific underlying project. This differs from a line of credit, where underwriting focuses on the underlying private lender/debt fund and the pool of loans held as collateral. Note-on-note financing works best in cases where the economics justify the additional time required for the bank lender to underwrite the transaction due to the concentration risk of lending on a single asset.
Note-on-note financing is a great alternative for private commercial real estate lenders financing large projects that require more in-depth analysis. The downside can be an elongated underwriting period — sometimes longer than 30 days — and higher closing costs. For smaller loan sizes, these costs may not be justified.
Choosing a Note Financing Approach
Note financing can provide private real estate lenders and real estate debt fund managers with flexibility and convenience that can empower them to expand their loan portfolio. Both note financing approaches have advantages. A discussion with the Western Alliance Bank Note Finance Group can help you select the most appropriate path for you and your business.
At Western Alliance Bank, our experienced Note Finance bankers can provide financing starting at $20 million. We can coordinate all your banking needs, from cash management to real estate lending. Discover more about our perspective and the operational efficiency benefits of note finance on the Lender Lounge podcast, or contact Lisa Alberti or Mark Roberts.
Note Finance
Western Alliance Note Finance, a national banking group within Western Alliance Bank, Member FDIC, delivers flexible, custom-tailored solutions and exceptional service that private lenders can rely on. The experienced relationship banking team is a trusted, committed resource empowering funds nationwide to access financing quickly. The Note Finance Group is part of Western Alliance Bancorporation, which has more than $80 billion in assets. Major accolades include being ranked as a top U.S. bank in 2024 by American Banker and Bank Director. With significant national capabilities, the Note Finance Group delivers the reach, resources and deep industry knowledge that make a difference for customers.
1. All offers of credit are subject to credit approval, satisfactory legal documentation and regulatory compliance. Borrowers are responsible for any appraisal and environmental fees plus customary closing costs, including title, escrow and documentation fees and may be responsible for any bank fees, including bridge loan, construction loan and packaging fees.