Commercial 4 Unit Refinance

5 Replies

Hey all!

I’m having trouble finding a commercial lender willing to refinance a 4 unit commercial building I’m about to purchase using a hard money loan.

Of the 4 units, 3 are residentially rented, and 1 unit downstairs used to be a grocery store but now is used as office space.

Beyond my inquiry about willing lenders, I’m also curious as to why this is raising red flags otherwise. Can someone help me better understand this? Even though this building has less than 5 units, it is still considered commercial.



Ian - It is difficult to tell based on the information you provided, but when lenders look at properties, under 5 units is deemed residential and over 5 units is commercial (multi-family).  Since there is (used to be?) office space involved, I can see this being commercial; however, this is an atypical property.  A few questions that pop up for me,

- How long has each unit been rented?  How long is the tenor of the lease? What is/are the business(es) leasing the space? 

Overall, this property looks like a mixed bag.  Is it residential? is it office? is it retail? As a lender, I'm having a hard time figuring out how to classify this. A bank may do this as a relationship loan, but I don't think most lenders would want to get involved.

Be careful getting into a hard money loan without a clear cut exit planned, or you may be stuck in a money pit.

Zoning is not determined by the number of units. Is the street mostly mixed use/commercial stores and retail? The city or county determined in their general plan the zoning for a block, for a plat map and what is the highest best use of that real estate. Most important are: density, parking, utility, neighborhood... You can get a residential loan on commercial zoned property if the commercial piece is less than 18% of the square footage. The problem is a residential appraisal will give no value to commercial use or commercial rents, thus your appraisal will come in short.  There are lots of lenders who can help you who are not hard money. You need to find one before you close to have an exit strategy other than to flip the property. 

If there is a mixed use building then it's a commercial transaction. I seriously doubt that the grocery was being used in a resi zoned space. I could understand someone using a space like an office but is resi saying home based business blah blah blah but not a grocery. So I will assume you have a mixed use building. If there are no or some 1 yr leases instead month to month it depends on lender appetite. Your qualification may be an issue. What's the real problem?

@Ian Plocky's not about the amount of units necessarily; it's about the mixture and could also mean zoning, and sq footage of the commercial space vs. the residential in the building.  Sounds like it's being considered a mixed-use building given the retail/office space downstairs.  What you need to look at is what is that space's sq footage compared to the resi upstairs b/c that also might open up lender options.  But it also will let you know if you have to get commercial lending. Is the property in SD?  Did you already buy it?  How much?  Are you just trying to take out the hard money loan?  Are all units rented?  What's the issue that your current commercial lender is having?  I'm interested to hear more.

@Ian Plocky since there is a business in one unit it is considered commercial - it doesn’t matter how many units total. One thought, depending on the zoning of the property, would be to get the office out and convert the entire building to residential.

Other than that, just start calling local banks and explaining the property, your plan, and your experience. You could also ask the owner of the office business where he/she banks - that bank may have an interest in helping the landlord.