Commercial loan questions, terminology

8 Replies

Hi everyone, I had a few questions specifically for Commercial loans. 

If the bank says they'll finance 80% LTV based on their appraisal, that doesn't mean they'd finance 100% of the deal if I got a low enough offer price does it? They'd still cap out at 80% requiring a down payment, i.e. apprasied value 200k, but I'm buying it for 160k, they would still only finance 128k and want me to cover the other 20% correct?

How do people pay off a 5 year balloon, just refinance if you don't have the capital? I suppose this is a way for the bank to make more over time, expecting you to have to refi at a higher interest rate? 

The bank requires rent rolls and operating statements for the property, so I should negotiate the deal 1st, get it under contract contingent on financing and then go to the bank? As opposed to getting a preapproval like I would with a conventional mortgage. 

Anything else I should look for or ask about for commercial loans? 

Typical peak to trough cycles run every 7 to 10 years. I do not like 5 year loans unless you have  a value add component and  know you will be selling off or you can easily refi even at a higher interest rate.

Lenders usually lend the LESS OF appraisal or purchase price based on LTV. Lenders do not want to be over exposed on a property.

So if you have a 2,000,000 purchase price property and appraisal comes in at 2,400,000 they do not go 2,400,000 X.80 = 1,920,000 loan

Now there might be unconventional lenders that might do some things regular lenders will not but rate also is generally much higher to compensate.

The difference in a lender on multifamily doing an 80% ltv loan versus 75% the additional higher rate usually is not worth it. Better to count on 75% LTV and build in your purchase price cap rate. Last thing you want to do is massage debt and LTV to make a cap rate purchase work on a property.

I like fixed 10 year debt. You have flexibility to sell or refi at the time you want plus more time to pay down if you want. If there is a pre-pay penalty you want ti gone by year 5.

Lot's of crap loans out there that lenders want to sell but I do not want them.

@Joel Owens Will the bank loan on a 10 year term on a property with a tenant that has less than 10 years left on their lease?

thank you Joel, looks like I'll need to keep shopping to find better terms. This particular bank only does 3 or 5 year terms. 

Hi @Donald S.

With any commercial endeavor, a bank would generally prefer you to have some skin in the game.  After you've built up a great relationship with a lender over time, you may be able to secure financing with less of your own money in each transaction.  

From a lender's perspective, the purpose of a 5-year balloon structure is not so much to make more money off of you as it is to mitigate their risk in the transaction.  The interest rate risk is one thing but there are other factors at play as well.  For example, if you're new to the lender they may initially perceive you to be a greater operational risk (i.e. how good of an operator is this person?  How likely is he to weather a market downturn?  Etc.).  A demonstrable history of investing success may be one of the reasons why @Joel Owens is able to secure 10 year fixed rate financing.  

As for interest rate risk in the current rate environment, the trend of rising rates typically leads lenders to shorten their terms.  3 to 5 years in your example.  However, if they are too conservative they will lose out on loan opportunities to other lenders.  It's up to you to shop around.  

That said, the real value from a lender comes when times are tough.  Will your lender stick by you and fight for you when rates rise or when the market turns against your property?  This is why developing a relationship with your lender is important.  

Anyone can lend money when times are good.  

No one can predict how things will change over the next 5 years.  Even modeling the next year is a challenge.  

If something completely out of your control happens to move against you, having a good lender is worth more than a few percentage points (much more).  

Hope you find a good one!

 thank you Kiley that's a great perspective,  I never thought of it like that.

 The short answer is yes, but it depends on a number of factors:

  • Credit-tenant vs. a mom & pop tenant
  • How long they've occupied the space
  • Single-tenant asset vs. multi-tenant asset
  • Specialty asset vs. One that can be leased easily
  • Leverage
  • The market, location, etc. 
  • Sponsor experience

Originally posted by @Peter A. :

@Joel Owens Will the bank loan on a 10 year term on a property with a tenant that has less than 10 years left on their lease?

I have found that lenders have varying appetites for asset classes and deal sizes.

You could go to one bank for example where they do commercial loans but it is an after thought to them. They might love residential more and have 80% of loans on the books for that. So their terms might be 3 to 5 fixed with a 20 amortization and a rate a 5.0 with 35% down.

Conversely you could have a lender aggressively growing their commercial loans. They might be willing to go 25 to 30% down, 25 to 30 year amort., 7 to 10 year fixed loan, and rate fixed in the 4's.

To get the good stuff you have to find the lenders that are hungry to do the type of loan you are searching for.     

Hello @Donald S. - You are correct. Conventional lenders will cap out at their max LTV. However, keep in mind that the market determines the price of a property. I say this because if you are buying it for $160K, then that is its value to the lender. Moreover, when it comes to commercial properties, other commentators are correct, a lender will want you to have "skin in the game".

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