Getting a Commercial Loan from a Bank is Not As Easy as You'd Think!

[John Mireles]

In fact, it's damn hard. I'm in the middle of trying to refinance my own mixed retail and residential property with US Bank. Actually, I'm done with US Bank. Despite a LTV of 40%, despite top tier credit, despite a 160% debt coverage ratio (the net income collected will exceed the monthly mortgage payment by 160% after expenses are deducted), despite a property that's appreciated by $500,000 over the loan term, and despite a perfect payment record over the past five years, my refinance application was denied.

I frequently see people on the forum asking about how they think they're close to being able to afford a commercial property and should they go for it. Well, unless your property is generating about double the cash required to service the loan, your net worth is at least if not more than the amount of the loan and your property will appraise at the price you're paying, you don't stand a chance - not with a traditional lender.

In the case of US Bank, they really stacked the deck against me. Instead of using the 3.5% interest rate that they actually quoted me to calculate the loan payments, they used a rate of 7% - even though there was no chance I'd be paying the loan at that rate. By using such a high interest rate as well as throwing in big management fees, vacancy rates etc that do not relate to my property, etc they were able to justify denying my loan.

The moral of the story here is that if you're thinking about going the commercial route, have your financing in place. Banks will impose conditions that make commercial loans prohibitive to all but the sweetest of deals to the most qualified investors. You may have luck with less conventional financing - which is where I'm headed. Just know that there's a huge difference between residential lending and commercial.

[Frank Gallinelli]

John Mireles Commercial lending has been in turmoil since the financial meltdown; I'm hearing that things are getting better, but the new normal is still difficult to deal with. My suggestion, if you haven't done so already, is to start by putting together detailed financial presentation about the property's current and projected performance; then bring that to a commercial mortgage broker, someone who can probably save you a lot of time by focusing on lenders who are a reasonably good match for your loan.