Commercial Loan Qualifications?

13 Replies

Hello All,

I was just wondering how I or my LLC would qualify for a Commercial loan on a muti unit property (10 units). I have no idea how this loans work. Thank you...

Bill,

Typically a lender is going to look at three years P&L and Balance Sheets for the property.  We typically look for 10% liquidity after close and a net worth equal to the loan amount.  I have seen better pricing for higher quality property and location.

Mark

Bill

As a prior commercial real estate lender for many years. Here are several things to need need to do and how most lenders will look at the property in today's lending world.

First call around and find lenders who are doing a 10 units apartment deals. You will be surprised how few there are in some markets.

The lender will look at the past history of income and expenses. After all of that they will take the current rents use AL LEAST 10% vacancy, even if it is 100% rented. They will use expenses that are customary for apartments in their market place. When they arrive at the net operating income they then will use a debt coverage ratio. This ratio depends on your market place, but it will be no less then 1.2. That will be the amount they will allow for debt service. Depending on amortization and interest rate will determine the amount they will lend. Also they will look at your personal net worth, income and credit report.

Based on all of the above will determine if they will do a loan and how much. Also you will have to personally guarantee the loan.

Good luck

John Miller, CCIM

Hi @Bill Newport  - this is all good info above. If any of it is "greek" to you, I suggest reading “Insider Secrets to Financing Your Real Estate Investments" by Frank Gallinelli, which is a very good intro to the process of evaluating and buying larger properties.

Underwriting is mainly based on the subject property, but lenders will also evaluate your personal financial situation too. Personal guarantee is common. Lenders will tell you their commercial loans are "non-recourse." When you read between the lines, you'll discover that the term non-recourse really is recourse. Banks are sly with their legal verbiage. So be weary of this.

Thank you all for your replies, your information is very helpful.....  Thanks again.

Bill let's say your 10 units are higher end at 100,000 a door.

That's 1 million in purchase price and you are putting down 25% or 250,000.

That leaves a 750,000 loan. You are looking at local to regional banks and credit unions at that point.

A 750,000 loan most commercial lenders will not look at anything under 2 million,. 750,000 loan is like a 50,000 house in residential for commercial. There just isn't any money in it for that lender. At 1 point that is 7,500. Likely they are having to split that fee with the company they are with or lending source. The borrower likely has no track record and is moving from residential to 5+ units, the sellers tend to keep poor books as they manage themselves with those few units, at a 10 unit level you really can't land a professional multifamily PM company as it's not worth their time versus larger buildings. You also can't employ a full time repair person with so few units.

For all these reasons this is why a local bank wants that small business because if they only have 40 million in deposits at that branch it is big business to them. I find it is easier with larger clients wanting to buy commercial who have larger funds to put down on multi million dollar properties. The lenders feel better that a large PM firm and repair person will be in place due to the size to run it. You can get non-recourse because you are away from the banks. Non-recourse does have standard carve outs for fraud and taking the money and not paying the lender etc.

What generally happens with my smaller clients is they partner up for a larger property to get better loan terms and non-recourse.   

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If I apply for the commercial loan to finance 10 units building, do I need to be incorporated? Or will commercial lenders talk to me as an individual?

Thanks for posting this topic.  It has been helpful to substantiate what I have read elsewhere.  I am currently looking at a potential investment in the San Francisco Bay Area.

While I get the DSCR needs to be 1.2 minimum does anyone know how commercial lenders view seller carry backs?

Here is an example.  Let's assume I go to buy this property:

  • Purchase Price: 2,000,000
  • 25% Down Payment: 500,000
  • Balance to finance: 1,500,000
  • Payments @ 3.8%: 6,989/month
  • NOI: 8,402/month
  • Cap rate: 5.49%
  • Gross Multiplier: 11.66
  • DSCR: 120.21%

Assuming the lender will do DSCR 1.20 this should pencil out on that end. But what if the seller is willing to carry 10%? Does that change the DSCR for the lender or is it unaffected?

Also how realistic is 3.8% interest and 25% down for northern California?  I've heard varying figures for both.  Also if anyone know a good commercial lender for the SF bay area and doesn't mind shooting me the name/number/email that would be great.

Thanks in advance for the replies!

Originally posted by @Terence J.:

Thanks for posting this topic.  It has been helpful to substantiate what I have read elsewhere.  I am currently looking at a potential investment in the San Francisco Bay Area.

While I get the DSCR needs to be 1.2 minimum does anyone know how commercial lenders view seller carry backs?

Here is an example.  Let's assume I go to buy this property:

  • Purchase Price: 2,000,000
  • 25% Down Payment: 500,000
  • Balance to finance: 1,500,000
  • Payments @ 3.8%: 6,989/month
  • NOI: 8,402/month
  • Cap rate: 5.49
  • Gross Multiplier: 11.66
  • DSCR: 120.21%

Assuming the lender will do DSCR 1.20 this should pencil out on that end. But what if the seller is willing to carry 10%? Does that change the DSCR for the lender or is it unaffected?

Also how realistic is 3.8% interest and 25% down for northern California?  I've heard varying figures for both.  Also if anyone know a good commercial lender for the SF bay area and doesn't mind shooting me the name/number/email that would be great.

Thanks in advance for the replies!

What the lender is willing to do will depend on the LTV, DSCR, and your experience. Generally, they are going to look at the total DSCR on the property, including the external financing, in addition to the "subject" debt DSCR. "Global DSCR" is also something many banks are looking at, including all your revenues and debt service, and want to see that above 1:1 at least...

I do not know if this company lends on the west coast but I 

Have purchase 2 small apartment buildings  one is 6 units and

The other 12 and they helped us on both.

Eastcoastinvestmentsco.com

Are you still looking for a commercial loan? if so contact me and we can discuss your situation and I can offer some options for you.

@Tom Corbin do you mind sharing your experience with them. Pre Qualification process and the deals you've done? Thanks.

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