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Participation Financing in Commercial Real Estate

April 16, 2025/in Uncategorized

When dealing with Private Credit Lenders and Credit Union Servicing Organizations (CUSO), you may have come across the term “Participation Financing”. If this term is new for you, and wondering what it means and how it affects you, do not worry. You are not the only one. In this blog post, we discuss what participation financing is, […]

RJED–Akron deal

April 9, 2025/in Multi-Family, projects

We’ve just closed the RJED–Akron deal for $1,038,000.00. This conventional loan supported the acquisition of Brownstone Apartments, a 21-unit multifamily property in Akron, Ohio. This deal represents another example of Avana CUSO’s commitment to providing flexible financing options for commercial real estate acquisitions.

Participation Financing in Commercial Real Estate

April 16, 2025/in Uncategorized

RJED–Akron deal

April 9, 2025/in Multi-Family, projects

When dealing with Private Credit Lenders and Credit Union Servicing Organizations (CUSO), you may have come across the term “Participation Financing”. If this term is new for you, and wondering what it means and how it affects you, do not worry. You are not the only one. In this blog post, we discuss what participation financing is, how it works, and what are the key advantages of participation financing in commercial real estate funding.

What is Participation Financing?
Participation financing is a collaborative lending model, where multiple commercial real estate lenders – credit unions, banks, and non-bank lenders – finance a single project. Each lender contributes to a specific portion of the total loan amount. Furthermore, they share profits as well as risks with each other.

Participation financing enables credit unions and financial institutes to share collective ownership of a commercial real estate loan. It becomes easier for individual lenders to manage large-amount loans. At the same time, the sharing of potential risks helps them support additional commercial real estate transactions.

How Does Participation Financing Work?
In the case of participation financing, each lender need not be involved in the origination and servicing of the loan. The original/lead lender plays a more active role in the participation financing program than the secondary/subordinate lenders. These roles differentiate participation financing from loan syndication. Participation financing has its distinct features.

Multiple Lenders
As noted earlier, multiple lenders are involved in a single-participation financing program. Each of these lenders contributes partially to the entire commercial real estate loan. The involvement of multiple lenders makes participation loans different from conventional commercial real estate loans.

Senior or Lead Lender
The senior or lead lender plays a more active and significant role in participation financing. The financial institute manages the loan origination and management process. It subsequently sells portions of the outstanding loan to secondary or subordinate lenders.

Secondary/Subordinate Lenders
Participation lending usually involves more than one secondary or subordinate lender. The secondary lender buys portions of the outstanding loan from the senior or lead lender. In addition, they collect principal and interest amounts from the borrowers according to predefined terms.

Loan Origination
As noted earlier, the lead lender detects participation lending opportunities and underwrites the commercial real estate loan. In addition, he or she structures the loan participation agreement. The agreement clearly defines the roles, responsibilities, and contributions of individual lenders engaged in the lending program.

Fund Allocation
The lead lender finances the commercial real estate project collectively with secondary lenders. Each lender funds a portion of the loan according to the terms of the participation agreement. Also, he or she receives dividends based on the investment.

Loan Management
Management of the participation loan is the sole responsibility of the senior lender. He or she ensures each lender receives payment on time by taking care of borrower communication, payment collection, and regulatory compliance.

Sharing of Risks
Lead and subordinate lenders share the ownership of a commercial real estate loan collectively. Hence, each lender shares credit risks associated with the loan with other participants. However, the amount of risk undertaken by individual lenders varies according to the loan structure and lending terms.

Sharing of Dividends
The ownership sharing makes each lender reap dividends from the commercial loan. According to the agreement, each lender can collect principal and interest amount from the borrower for his or her portion of the outstanding loan.

What are the Advantages of Participation Financing in Commercial Real Estate?
Participation financing creates opportunities for entrepreneurs to fund large commercial real estate. At the same time, the financial arrangement helps lenders to fund large projects without undertaking additional credit risks. Hence, both lenders and borrowers reap several benefits by joining participation financing programs.

Large Project Financing
When funding a commercial real estate project, an entrepreneur can choose from several conventional loan solutions. However, each conventional loan enables him or her to secure credit from a single lender. On the other hand, participation financing programs help them to access larger loans from multiple lenders. Hence, entrepreneurs prefer participation loans to conventional loans when funding large-scale https://extensiafinancia.s440.sureserver.com/projects-avana-cuso/.

Credit Risk Sharing
Multiple lenders pool their resources and share credit risks when joining participation financing programs. Hence, the entire credit risk is spread over the participants. No lender bears the loss fully, in case the commercial real estate project does not perform as expected. Leading commercial real estate lenders join participation financing programs to get dividends without increasing risks.

Higher Dividends
Often non-established lenders find it challenging to increase dividends when the commercial real estate market is slow. Participation financing creates opportunities for them to generate more lending income by buying participation loans from established lenders. Also, they can increase dividends without undertaking higher risks.

Asset Diversification
Financial institutes have the option to join participation financing programs across locales. Hence, they can add new projects to their loan portfolios without undertaking additional risks. At the same time, a financial institute can diversify its assets and maintain portfolio integrity by joining selected participation financing programs.

Stronger Customer Relationship

Financial institutes often lose customers to competitors when they do not fund large commercial real estate projects. Participation financing enables them to fund large projects by sharing ownership and risks with other lenders. Hence, it becomes easier for them to maintain customer relationships and foster customer loyalty.

The Role of AVANA CUSO in Participation Financing in Commercial Real Estate

Reputable credit union service organizations like AVANA CUSO contribute hugely to facilitating participation financing in the commercial real estate sector. The services provided by them facilitate collaboration among credit unions and make them share credit risks. We can understand the significance by discussing some of these important roles and services.

Resource Pooling
Individual lenders find it challenging to fund larger commercial real estate loans due to constraints like limited capital, exposure limits, and risk concerns. CUSOs help them overcome these constraints by pulling resources. They enable lenders to fund lucrative commercial real estate projects by facilitating seamless collaboration between participants.

Transaction Management
Many lenders often lack the expertise required to manage complex participation loans. CUSOs use their experience and expertise to simplify the participation loan management process. The expert services provided by them help lenders simplify activities like payment processing and long-term credit reviews.

Risk Distribution
CUSOs distribute credit risks among several participants. Hence, individual lenders get higher dividends without undertaking a higher level of risk. The service ensures a lender is not overexposed to a particular borrower or loan.

Underwriting Support
Their expertise places CUSOs in a position to underwrite high-value commercial real estate loans more accurately and efficiently. CUSOs deliver risk-averse dividends to participating lenders by appraising collaterals and assessing borrowers like experts. At the same time, they ensure that no lender violates regulatory restrictions.

Conclusion
Credit unions, banks, and non-bank lenders finance large commercial real estate by joining participation financing projects. However, credit union service organizations (CUSOs) manage the participation lending process more efficiently. Leading credit unions use CUSO to overcome the lending restrictions imposed by the Credit Union Membership Access Act. At the same time, they generate risk-averse returns by selling portions of the commercial real estate loans to secondary lenders.

About AVANA CUSO
Established in 1998, AVANA CUSO is one of the most seasoned credit union service organizations (CUSOs) union service organizations (CUSO) with a focus on commercial real estate lending.

Driving excellence through end-to-end customer service and our investments in technology, AVANA CUSO connects credit unions with commercial real estate entrepreneurs, brokers, and small business owners through participation lending.

Our mission is to help credit unions diversify their lending portfolios by expanding their lending programs beyond local communities, mitigating concentration risk while enhancing loan-to-share ratios.

Part of the AVANA Family of Companies, AVANA CUSO is an ESG lending organization that strives to improve communities by funding socially responsible projects that boost economic growth and foster job creation. AVANA CUSO is headquartered in Glendale, Arizona.

Want to achieve profitable growth by leveraging the benefits of participation financing? Contact us.

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Participation Financing in Commercial Real Estate

RJED–Akron deal

Participation Financing in Commercial Real Estate

RJED–Akron deal

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Participation Financing in Commercial Real Estate

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