Loan for Commercial Property

6 Replies

Hi all,

Fairly new to BP and real estate investing. I'm currently under contract for a set of 3 duplexes on a single lot zoned commercially. The current owner is a GC and rehabbing two of the units (which will be finished upon closing). The other 4 are occupied but rents are below market value. I had trouble initially finding a smaller bank to potentially do business with and seller financing was off the table. I submitted an application to Wells Fargo, but was rejected due to the property debt service. Being it's a 33% vacancy and the rents are below value they said it's a no-go. Currently back to the drawing board and looking for options on financing. I know hard money is out there. Maybe a bridge loan? I do have cash to purchase, but would prefer not to do that (I believe there's some cash out refi options available though similar to the Fannie Mae?). This is my first commercial venture. Looking for any thoughts/recommendations ya'll might have come across before or anything I'm overlooking here!

Cheers,

Brian

Welcome to BP, @Brian Metz !  Conventional lenders such as agencies and banks are a great option for stabilized properties.  If the property is 33% vacant it's not stabilized so that limits the lenders.  Or at the very least it constrains proceeds due to debt service coverage limitations.

That said, if you have the funds to pay cash you also have the funds to make a larger down payment. Perhaps the bank declines a 75% LTV loan, but if you re-approach as a 50% LTV loan you might get a favorable answer.

Another option is a bridge loan.  There are lenders out there that specialize in this type of lending, and you can find them by searching online or hire a commercial finance broker to source your debt.  And I'm sure some BPers can chime in with some recommendations.  In my opinion you'll have a higher success rate with a broker because not only do they know who the players are, they also know how to present your deal for the best response (and they know which ones to avoid, too).  Bridge loans are more expensive than a conventional agency or bank loan but you can typically get higher leverage than you would with a bank loan because they typically have lower debt service coverage guidelines.  You just have to have a good plan as to how you are going to bring up occupancy and increase the income.

An any case, your goal would be to refinance in 2 years or so after the income has increased (and thus the value has increased as well) to take out the more costly (or lower leverage) financing.

I would agree with just about everything Brian said. I think a broker is a good option, particularly for a unique or challenging circumstance such as the one described above. I would just add that if you have the cash to self finance initially, you can always look to cash out later after the property has been further stabilized. It's always easier to finance a propert that you already own free and clear. After you own it, you have more leverage with the banks and you can control things more readily. If your investment plan succeeds, you will be able to refi down the road. Lenders will get more creative for larger loans, but for smaller loans such as this, things need to fit in the box more so or it's not worth their time and brain power to figure it out. In addition, the more creative real estate finance minds aren't handling these smaller loans.

Just throwing out my two cents cause I’m in a similar contract right now.

I’ve negotiated a deal with my seller. Contract is on a 4plex under performing and 3 out of 4 units are empty. I’ve been able to extended the closing date to be 45 days and I can start advertising the empty units during this period. My bank lender needs 3 out of the 4 leases to fund the deal, it’s in a hot area so I’m confident I can actually fill the 3 empty and be at 100%.

On a side note the seller wanted say on who gets accepted Incase for some reason the deal didn’t close. So we agreed upon some pretty standard requirements to qualify for the rental lease.

Doesn’t hurt to ask the lenders and sell if this is an option....

Good luck and don’t give up, someone will say yes!!

I always say why not do an equity partnership.  I mean it is better to have a % of a good deal than no deal.  Buy the partner out as soon as possible. Then you have a whole.  Or leave the partner there and keep finding deals for the partner to do more.  50 % of nothing is nothing.  50% off something is cash in your pocket.  

Thank you all for the replies! Very much appreciate the insight, experience, and guidance. I will keep you posted how it turns out and investigate some of your suggestions.

Cheers,

Brian

Originally posted by @Michele B. :

I always say why not do an equity partnership.  I mean it is better to have a % of a good deal than no deal.  Buy the partner out as soon as possible. Then you have a whole.  Or leave the partner there and keep finding deals for the partner to do more.  50 % of nothing is nothing.  50% off something is cash in your pocket.  

 How do you know it's a good deal? 

We need to see the 🔢 S. 

I' S this  a $60,000  or $600,000 deal?