Banks and private credit operate within the same industry, but it’s their differences that make their partnerships fruitful. One difference is how they define investment commercial real estate and owner-occupied commercial real estate.

Investment commercial real estate is used to generate passive income, not to occupy and operate a business out of. It can be retail stores, shopping malls, apartment buildings, storage facilities, warehouses, etc.

Owner-occupied commercial real estate is property a company owns and uses for their business. It is typically categorized into a handful of property types such as industrial, manufacturing, retail and office space.

So where’s the discrepancy between banks and private credit?

Well, it’s how banks perceive owner occupancy. From a bank’s perspective, business owners have to occupy at least 51 percent of the property for it to be considered owner-occupied. If the majority of the business occupancy is anything below, it’s classified as investment. The reason banks have this standard is primarily due to regulators and risk management.

However, since private credit firms are not banks, their lenders do not have to adhere to FDIC regulations which gives them plenty of flexibility. Owner-occupied could be a wide variety of occupancies ranging from 100 percent down to less than 25 percent, depending on how the private credit lender defines it internally.

Symbiotic Partnerships

For banks that only offer owner-occupied commercial loans, their clients may be denied traditional bank financing due to the owner occupancy percentage.

'This recently happened to a Houston-based medical doctor. She owns a retail strip center and operates her medical company out of it—but she only occupies 30 percent of the entire property. Automatically, the loan was deemed as investment real estate by her bank and her commercial loan application was denied.

That’s when private credit steps in and helps. Referred to Flatbay Capital by her bank, Flatbay’s team classified the doctor's commercial real estate as owner-occupied and solved the funding gap with a $3.5MM bridge loan.

Though these differences may be minute, knowing what constitutes investment and commercial real estate for private credit will help bankers and entrepreneurs make better decisions regarding their clients and businesses.