Presented By: Houlihan & O'Malley Commercial Services
What Is Your Best Loan Option for a Commercial Real Estate Investment?
If you are looking to start investing in Commercial Real Estate, part of the process will be researching how to fund your investment and what will work best for your scenario.
There are conventional sources, such as banks, and non-conventional sources, typically private lenders that provide bridge (a.k.a. hard money) funding. A conventional source typically takes at least 90 days to fund and frequently longer, whereas private sources can fund in one week.
Commercial Real Estate Mortgages are used for a variety of reasons but, of course, the underlying reason for all of them is a borrower’s need for cash. Whether it be acquisition, renovation, development or just to free some cash up using the equity of the property, borrowers use commercial mortgages to make up for a shortfall in liquid assets.
Commercial real estate loans are typically made to business entities formed for the specific purpose of owning commercial real estate. Entity types include partnerships, corporations, funds, trusts, and real estate investment trusts (REITs).
Here are some of the typical commercial mortgage types:
Traditional commercial mortgages have loan terms that range anywhere from 3-20 years, with a balloon payment due at the end of the term. They usually amortize on a 30-year schedule, thus the need for a balloon payment at the end of the loan term. Rates for these loans generally start 50 to 150 bps higher than your typical residential mortgage for a standard 15-year self-liquidating mortgage. The shorter the term of the loan, generally the lower the rate. As with a standard residential mortgage, the borrowers/guarantors credit scores are required to be at a certain level to qualify for these loans.
SBA loans are backed by the power of the Small Business Administration and their affiliated CDC’s. These loans give borrowers long term financing at relatively low rates, however, qualifying for an SBA mortgage is a rigorous process. Each CDC covers a specific geographic area and works with certain approved lenders. In a typical SBA 504 loan the lender would fund approx. 50% of the loan, the SBA would fund around 40% and the borrower would have to come up with 10%. In addition, to qualify for SBA funding you must be an eligible type of business, your projected operational cash flow must be sufficient to support the debt, you must have good credit and tax return history along with expertise in the particular field of business you operate in. These are just some of the requirements in order to qualify for an SBA loan.
Commercial Bridge and Hard Money Loans are high cost, however, these loans typically can close within 1 to 3 weeks of application and rarely have credit rating/personal financial requirements that both traditional and SBA loans have. Bridge loans and Hard Money loans are synonymous. They offer short-term financing to “bridge” the gap between conventional loans or to help borrowers who wouldn’t qualify for traditional/SBA loans. These loans are asset based with little to no personal financials needed, and are usually interest only loans with balloon payments due at the end of the term, which can range anywhere from 3 months to two years. Rates and fees for these loans are higher than other commercial mortgages; however, bridge/hard money lenders tend to move much quicker and can close loans well before the standard 90 day plus period seen for conventional loans.
If a Hard Money Loan seems to be the best option, here are some steps you can take to help the process go smoothly and quickly for you and the lender.
Present a Description of the Property and the Value or Potential Value of the Property
Rich Salinaro, Assistant Director of Private Lending with H&O Capital Funding notes, “Nothing drives lenders crazier than trying to figure out what a property is. As a potential borrower you should provide a brief description of the property, along with the size, number of units and a rent roll. If you have historical expenses those will be helpful as well.”
Lenders don’t want to make bad loans, but they won’t even consider a loan without some idea of the value of the property as compared to the loan request. If you are looking for a quick answer from a hard money lender to finance a deal, you must present the lender with enough information for the lender to be able to ascertain an idea of the value or potential value of the property before they’ll consider the deal. This is called the Loan to Value ratio.
Have a Financial Plan
Hard Money Loans are typically very short term (1-2 years), so Lenders always want to know the exit plan. Will it be a refinance? Sale of the property? Bringing in a new equity partner?
Lenders want to make loans, get paid off and recycle the money into a new loan. Without a clear-cut exit strategy most lenders won’t even consider a deal, however, some experienced lenders are willing to help their borrowers determine what the best exit strategy is. H&O Capital Funding, for example, has decades of experience operating and managing real estate assets across the northeast. They offer borrowers advice on how to best position their property to maximize value and help them determine an optimal exit strategy.
Be Prepared to Offer Additional Documentation the Lender May Request
Hard Money loans are typically asset based, so there is no need for credit reports or tax returns. Lenders do, however, want to see a rent roll, copies of any commercial leases (or residential for 1-4 family properties) and the certificate of occupancy for the property. Lenders will also want to know of any violations or restrictions on the property, it’s best if you are upfront with regards to anything that may affect the value of the asset. If you are planning on doing a renovation the Lender is going to want to see a budget for the construction.
Is the Loan for a First or Second Lien
Are you paying off your first mortgage? Or do you want a second behind the first? Does your bank allow second mortgages? These are important questions you need to have the answers for before you approach a lender. This also calls into question the Loan to Value ratio. You may want to keep your conventional first mortgage due to the low rates/better terms, but if the value isn’t there to support a 2nd mortgage refinancing may be your only option.
Make sure you have a Clean Title
Do you have clean title to the property? Or are there judgements, liens or any other liabilities against either yourself or the property? Some of these can be overlooked or paid off at the closing table, others may be deal killers. Make sure to make Lenders aware of any potential issues when you apply for your loan.
H&O Capital Funding specializes in Bridge/Hard Money financing with a special emphasis on closing the loans as quickly as possible. With our years of experience as a commercial and residential real estate brokerage company, commercial appraisal division, owner/operators of commercial real estate throughout the tri-state area, as well as spending the past 15 years in the private lending business, we have the know-how to get loans closed as quick as anybody in the business.