Financing of Commercial Real Estate

When you get conventional financing for residential loans a major part of the underwriting is the credit and income of the borrower. Naturally the value of the property is important. But the borrower is more important. This is not true with a “hard money” equity based loan. These are usually available with a maximum Loan to Value of 65 to 70%. (Thus if the house is worth $100,000, a 65% Loan to Value loan , LTV, would be $65,000).

The situation is reversed for commercial income producing loans. The focus here is on the property, the income it produces and the credit worthiness of the tenant. In fact, many commercial loans are non-recourse to the borrower. This means that the property is the sole security for the loan. This excludes certain issues like fraud by the borrower, environmental problems and so on.

This is especially important with a single-use property or single tenant facility. Public companies are looked upon more favorably than private companies of the same size and financial strength.

A single use property could be a fast food franchise or even a school or church.  Questions the loan underwriter will have will include:

  • What happens if this business fails?
  • What would it cost to convert this property to another use?
  • How long will it be empty?
  • What happens at the end of the lease?
  • A multi-tenant apartment building is obviously easier to re-rent than an empty Wal-Mart® store.

Visit our FREE Microsoft ®Excel Spreadsheets that can help you. Select the following two from the list:

  • 10-Year Real Estate Investment Analysis
  • Breakeven Analysis for Investment Property

When developing a commercial property it is quite common to get a short term loan to fund the property acquisition and the construction followed by permanent long term financing once the property is leased.

Construction Loans

Conventional commercial lenders like to see a CASH investment by the developer of at least 20% of the project value. They typically are not swayed by stories like, “I bought this land last year for $1 million but it is now worth $3 million.” The cash investment requirement could be a cash investment by the developer in buying the land.

To learn more about commercial lending, order the book “Real Estate Finance and Investment Manual” by Jack Cummings from our Bookstore.

Larger commercial loans are often funded by life insurance companies or by Commercial Mortgage Backed Securities. These loans are packaged by Wall Street specialists and are often broken down into packages of income stream.

Learn about Loan Securitization.