Refinancing a Commercial Loan to a Residential Loan?

Question

Hi everyone. I've tried to search a similar topic, but I couldn't find anything quite the same. This is a hypothetical question, but here goes!

A property I'm interested in buying is zoned commercial; downstairs is 1800 sq ft (company occupied) and upstairs is 1800 sq ft (consists of two 900 sq ft apartments). I spoke with my mortgage banker yesterday and asked about getting a residential mortgage for this mixed-use property. She said I can if the commercial square footage is 25% or less (she said that's a typical rule). Because the sq footage is 50% I would need a commercial loan.

SO, lets say I get a commercial loan secured and over the next 10 years, I convert half of the lower level sq footage to a residential apartment. Do you think it's possible to then refinance the property with a residential loan??? The commercial portion of the property would only be 25%. That would open me up to more options and I would then have a much easier time trying to sell the property if residential financing be can be obtained.

I'm a newbie so any help would be apreciated. Thanks!

Bill Gulley · Answer

This is a gray area in underwriting and is tuff to get done due to appraisals, the lack of mixed use properties. That 25% rule isn't all that accurate for secondary market loan for a property in a commercial zoning, the lightest commercial zoning, will not prevent residential financing but it depends on the commercial activity as well and use of the property. Say a garage was converted to a hair saloon, this can be a gray area but has been done. A bookkepper having an in home office can be done. The issue is the amount of commercial traffic, the public using the services or shopping, as it presents commercial exposures. Another issues is the highest and best use assigned by the appraiser. If the highest and best is commercial, it won't fly. The rents that could be gained from the living space need to exceed the rents expected for the commercial space. Any lender will assume an owner will use the property to its highest and best use.

I have done mixed use but with owners using the commercial space.

Any space that is leased out for a commercial venture by the owner will not meet the owner operator issue. It will be commercial.

If you were talking to a bank, that may be thier rule, it will be on them to sell the note in the secondary and they may have a problem. Any prudent lender will run it by a secondary market underwriter and who knows what they may think in ten years. I would not rehab the place based on her assessment as it still may not fly, especially if it's a leased commercial space. Good luck... :)

Roc P. · Answer

Great question and great answers. I would think there are zoning issues, with what you want to do so you probably want to check with the local government and request a zoning hearing to change the use. If all goes well you can bring the info back to the lenders, who should want to play ball. Good luck Roc

Scott S. · Answer

That's good advice Bill. Thank you again!

Bill Gulley · Answer

I always suggest people have a banking relationship with at least two banks who deal in commercial. So long as you pay as agreed a bank is in the business of making loans, they will want good business in ten years and further out. The risks really are with banks getting into internal problems, not closing so much (but they do) but changing loan requirements, having different capital requirements, having concentrations in loans or too much with one borrower. Theses are unforseen issues and can effect the way a bank can lend.

Establish a relationship with other banks so that if one says they can't you have established options instead of hunting for a new loan without a relationship.

Your responsibility is to keep yourself loanable, good credit, debt ratios being acceptable, staying away from contingent liabilities and having sufficient equity. If you mind these areas and maintain options, you shouldn't have a problem. Good luck... :)

Scott S. · Answer

Wow thanks Bill! That was a very detailed explanation. Sounds like it's not cut and dry. The 10 year buyout on commercial loans scares me a little. I was hoping to find away around that.

Refinancing a Commercial Loan to a Residential Loan?

Refinancing a Commercial Loan to a Residential Loan?

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