Lending on a commercial property under $1million?

3 Replies

Does anyone have financing suggestions for a 14 unit apartment complex that is under $1,000,000? I'm looking for a 30yr fixed, 80% LTV. The lenders I've found only offer a 20yr amortization, which greatly diminishes my cash flow. The other lenders that offer a 30yr want to lend on $1M+.

Any suggestions?

@Scott Spicer  anything under that $1M threshold will be recourse debt, where they can come after personally. The terms you are seeking would be from agency debt, and if you can get over that $1M loan balance, you could pursue a Freddie Mack Small Balance Loan. You can borrow from $1M to $7.5M; terms can range from 5 - 20 years, with a 30-year amortization. Your current 14 units would require you to seek a bank loan, and yes, the amortization usually maxes out at 20, and the rates are a bit higher.

This wouldn't work for your 14 unit, but what if you found a JV partner and purchased a more expensive, higher-quality asset that did get your loan balance into that SBL range? Then you would have your terms and have non-recourse debt where you are not on the hook. You would want to JV with someone who already has loan experience.

@Scott Spicer there are a lot of lenders in this space! As @Rick Martin referenced above, the best terms would come with Freddie SBL which has a floor of $1M loan amount (not purchase price). You venture into what many refer to as the small-balance space when you dip under that desireable $1M+ loan amount. These lenders can include:

- Local Banks & Credit Unions (typically lowest interest rates, but capped to 25-yr ams and usually 3, 5, or 7-yr balloons)
- The "Secondary Market Lenders" who are going to require a PG usually, but will offer that 30-yr fixed, as well as the ever-so-sought after 5 - 10yr Hybrid loans (I/O during first 5-10 years, then converts to a 20-25 yr fully amortizing loan [no balloon!]). Rates will be available in the 4.49 - 6.49% range depending on the assets and it's cashflow, as well as your credit score.

So many people get hung up on mortgage rates that banks have, however... I always show my clients the real difference between that 3.75% 25-yr amortization payment from the bank (which will require 3-yrs business and personal tax returns, t-12/t-24 financials, balance sheet, paystubs, and do a global DTI etc) vs a "Secondary Market Lender" who will offer the 4.5 - 5.5% (on average) at 30-yr Fixed terms (who will typically NOT require anything regarding income, but focus on appraised value and DSCR).

Taking a $500,000 mortgage:
- 3.75% 25-yr Am (5-yr Balloon) = $2,570.66 P&I
5.00% 30-yr Fixed (no balloon) = $2,684.11 ($113.45/mo difference)

Take it further, many lenders offer buy-down options (often a 2:1 buy down, meaning for every pt you pay at close, you reduce your rate 0.50%) 
- 4.50% 30-yr Fixed (no balloon) = $2,533.43

This is LOWER than the bank's monthly P&I Payment for 1 extra point ($5,000), which by the way saves you $150.68/mo from the 5.0% rate. You'll pay yourself back on that buy down in 33.18 Mos ($5,000 / $150.68) So long as you hold the property for 34+ months, you're in the black. Everything after is savings in your pocket.

Which of the above makes most sense? Depends on your long-term goals. I'd say 3 out of 4 investors I consult with like the buy down option on the 30-yr fixed with no balloon as most hold onto their investments longer than 3 years. If you're not, well a 3/1 ARM is probably your best product anyways. It's really not hard to compete with the banks if you really take a good look at the numbers.

Hope this helps! Feel free to PM me with any questions on this!

@Scott Spicer Rick and Marty are correct on the Freddie SBL product - it's a great program but has a hard floor of $1mm. If the deal is local to you in Arizona, there are some great banks in that small balance space who can offer 10-year fixed rate money on 25-30 year amortizations / high 3% rates and they may be able to get up to 75% LTV. Try Washington Federal or First Fidelity; Our Phoenix team has done a lot of small-balance deals with them. Let me know if you need contacts.