Commercial Real Estate
Outstanding Interest Rates and Terms for Your Next Commercial Real Estate Financing Request
For the past ten years, I have connected owners of commercial real estate with lenders across the county for their acquisition and refinancing requests. Multi family, mixed use, (combination of residential and retail), industrial, warehouse, and medical office are currently the most appealing to lenders.
The 3 keys to loan approval in commercial real estate are:
Cash Flow
Cash flow coverage – Does the property have enough cash from lease income coming in to meet the mortgage payment?
Down Payment
Does the borrower have sufficient funds to cover the down payment for the property purchase? The required deposit can range from 10% to 40% depending on the type of loan
Credit Score
The credit score of the borrower. Most bank and credit union lenders prefer to see scores at least 650 – 675 and higher. Hard money lenders can consider lower scores, lower 600s, as long as the property is solid.
Why should I consider a SBA loan?
SBA loans will usually require a smaller down payment (10%-15%) from the borrower compared to a non SBA (conventional) loan, which typically requires the borrower inject 25-30% into the total loan request.
With the SBA guaranteeing part of the loan against default risk, lenders are more open to approving the loan compared to a conventional loan where the lender has a much higher default risk.
SBA Financing - Quick take-away
If the financing is for owner-occupied commercial real estate or heavy machinery/equipment, think SBA 504. If the financing is for working capital or for the purchase of either a business or inventory, think SBA 7a. And remember, both of these programs can be used multiple times or even simultaneously. Also, for SBA commercial real estate loans, the SBA requires the borrower occupy at least 51% of the property.
SBA 504 Loan Structure
- Bank 50%
- SBA/CDC 40%
- Borrower deposit requirement – 10% (additional 5% if single purpose real estate).
Eligible Use
- Buy, build or renovate primarily owner occupied commercial real estate
- Purchase capital equipment with a useful life of ten years or more
- Refinance existing qualified commercial mortgage debt.
SBA Financing - Quick take-away
- $5.5 million for manufacturing or “green” projects.
SBA 7A Loan Structure
- Lender typically 85%
- Borrower deposit requirement 15%
Eligible Use
- Buy, build or renovate primarily owner occupied commercial real estate
- Refinance existing debt
- Purchase capital equipment
- Working capital or inventory
Loan Amounts
- Loan amounts – Up to a $5 million gross loan
Interest rate and terms - Predominately variable
- Up to 25 years on commercial real estate
- The useful life on equipment or business acquisitions
- Up to 10 years for working capital
Initial docs requested by most Commercial Real estate lenders
- 3 years of business and personal tax returns.
- Current year profit and loss statement / balance sheet dated within the most recent 60 days
- Current business debt schedule (listing your monthly business dent obligations).
- Leases / Rent roll for the property.
- A copy of the purchase and sales agreement for the property (on a new acquisition).
- Personal Financial Statement for each borrower with a 20% or greater stake in the property.
Conventional loan - (NON SBA)
When the property owner does not occupy at least 51% of the space, conventional bank or credit union financing is the preferred route. A standard bank loan as of mid November 2022, can be priced at 6.5% fixed for five years, with a 25 year amortization. Conventional loans will require a larger down payment, typically 25% of the property purchase price. However, with the interest rate locked for 5 years, refinancing from a SBA 7A real estate loan which carries an adjustable rate, (currently close to 10%) to a conventional could save the borrower thousands of dollars monthly.
Bridge Loan - Hard Money Loan
Occasionally, life events happen which negatively affect a bottlers credit score. When the score falls below 620 in most cases, the borrower will need the help of a bridge or hard money lender. The terms of a bridge loan are often interest only, 10%-12% annually, with a 60%-65% loan to appraised value. Pre payment penalties with bridge loans are usually waived after 6 months. The term “bridge loan” is used as this type of financing serves as a bridge for the borrower. I can connect the borrowers with credit repair specialists who offer guidance on how the borrower can improve their credit to the point that a traditional lender will be interested in offering a term sheet which will refinance the property away from the bridge lender.
