commercial Lending
- Conventional commercial loans are flexible mortgage solutions that are provided by a bank, credit union, or savings institution that can be used to finance a range of commercial properties. Both novice and experienced commercial property owners may use these loans as the first-lien financing on a commercial property.
Conventional Loan Highlights
Eligible Properties: Multifamily, Office, Retail, Warehouse/Industrial, Hospitality, Medical/Healthcare, Self-Storage
Loan amount range: Minimum $1,000,000
Interest Rate: Fixed rates vary. Floating Rates from 2.30% over LIBOR. See current LIBOR rates.
Loan Term: 3 to 15 years
Amortization: 10 to 30 years
Maximum LTV: 80%
Minimum DSCR: 1.20x
Minimum Debt Yield: 7-8%
Recourse: Can be non-recourse, limited-recourse or full recourse.
Prepayment: Can be no prepay penalty, step-down, or flat-rate.
Advantages of Conventional Loans
Conventional commercial loans features create several advantages that make the loans attractive in various situations:
- Finance Distressed Properties: Since the loans are normally underwritten not only on the basis of a property but also on account of a borrower’s personal guaranty.
- Available To Inexperienced Borrowers: Available to those who have strong financial positions, as they can rely on their personal guaranty more than their experience during the application process.
- Loan Size: Available for less expensive properties that don’t require borrowing a large amount.
- Faster Underwriting: Conventional loans are faster to underwrite than government-backed loans that must go through a federal agency.
Disadvantages of Conventional Loans
Even with their many advantages and overall flexibility, there are some disadvantages that come with conventional commercial loans. Some of the more noteworthy disadvantages are that:
- Requirements: Borrowers normally must have a good credit score and sizable post-closing net worth and liquidity in order to meet the personal guarantee requirements.
- Personal Liability: Full and partial-recourse conventional loans leave borrowers personally liable if a loan goes into default.
- Fixed Interest: Often comes with shorter fixed interest rate periods than commercial mortgage-backed security loans (CMBS) loans offer.
- Conventional commercial loans are flexible mortgage solutions that are provided by a bank, credit union, or savings institution that can be used to finance a range of commercial properties. Both novice and experienced commercial property owners may use these loans as the first-lien financing on a commercial property.
Conventional Loan Highlights
Eligible Properties: Multifamily, Office, Retail, Warehouse/Industrial, Hospitality, Medical/Healthcare, Self-Storage
Loan amount range: Minimum $1,000,000
Interest Rate: Fixed rates vary. Floating Rates from 2.30% over LIBOR. See current LIBOR rates.
Loan Term: 3 to 15 years
Amortization: 10 to 30 years
Maximum LTV: 80%
Minimum DSCR: 1.20x
Minimum Debt Yield: 7-8%
Recourse: Can be non-recourse, limited-recourse or full recourse.
Prepayment: Can be no prepay penalty, step-down, or flat-rate.
Advantages of Conventional Loans
Conventional commercial loans features create several advantages that make the loans attractive in various situations:
- Finance Distressed Properties: Since the loans are normally underwritten not only on the basis of a property but also on account of a borrower’s personal guaranty.
- Available To Inexperienced Borrowers: Available to those who have strong financial positions, as they can rely on their personal guaranty more than their experience during the application process.
- Loan Size: Available for less expensive properties that don’t require borrowing a large amount.
- Faster Underwriting: Conventional loans are faster to underwrite than government-backed loans that must go through a federal agency.
Disadvantages of Conventional Loans
Even with their many advantages and overall flexibility, there are some disadvantages that come with conventional commercial loans. Some of the more noteworthy disadvantages are that:
- Requirements: Borrowers normally must have a good credit score and sizable post-closing net worth and liquidity in order to meet the personal guarantee requirements.
- Personal Liability: Full and partial-recourse conventional loans leave borrowers personally liable if a loan goes into default.
- Fixed Interest: Often comes with shorter fixed interest rate periods than commercial mortgage-backed security loans (CMBS) loans offer.
- Commercial mortgage-backed securities (CMBS) loans are some of the most common ways to finance U.S.-based commercial real estate projects. The loans are widely available for nearly all types of commercial properties, and they have some notable advantages over other kinds of commercial property loans.
- CMBS loans are also referred to as “conduit loans” because of how they’re resold as securities. The loans are frequently packaged together and resold to investors as fixed-income investments. Thus, the loans are essentially resold as bonds and provide commercial property owners with indirect access to bond investors’ capital.
CMBS Loan Highlights
Eligible Properties: Multifamily, Office, Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage
Loan amount range: Minimum $2,000,000
Interest Rate: Fixed rate throughout term and priced over corresponding swap rate.
Loan Term: 5, 7, and 10-year fixed
Amortization: 25-30 year amortization with up to 10 years of interest-only available in select instances.
Maximum LTV: 75%
Minimum DSCR: 1.20-1.25x
Minimum Debt Yield: 7-8%
Recourse: Non-recourse except industry-standard “bad boy act” carve-outs.
Prepayment: Typical 2 to 3 year lockout, defeasance or yield maintenance thereafter.
Reserves: Taxes, Insurance, Replacement Reserves, Tenant Improvements and Leasing Commissions typically required.
Advantages of CMBS Loans
CMBS loans’ features offer several advantages that make them an attractive financing option in many situations:
- Fixed interest rates: Usually these are fixed and the rates are commonly lower than what’s available through conventional mortgages. Interest rates are typically based on the current U.S. Treasury rate with a margin added on.
- Both Non-Recourse And Assumable. The former feature helps protect individuals, while the latter makes it possible to sell a commercial property without refining the loan terms.
- Loan Size: Available in a wide range of amounts, and they aren’t restricted to the terms that commercial mortgages which are offered through major agencies must meet.
Disadvantages of CMBS Loans
The advantages that CMBS loans offer make them well-suited to many properties and projects, but property owners should be aware of two disadvantages:
- Tax Laws: Although conduit loans aren’t limited to the restrictions of major agencies, they still must comply with tax laws that allow the loans to be resold as securities. This restricts what variables borrowers can negotiate in the loan terms.
- Prepayment Penalties: Carries more risk than the prepayment penalties of conventional mortgages. Whereas a conventional mortgage’s prepayment penalty is normally calculated as a percentage of the lost interest, a conduit’s loan is often tied to the Treasury yield. If Treasury bonds go down substantially, this can result in substantial additional prepayment costs.
- Commercial bridge loans are a short-term financing solution that’s widely used within the real estate industry. Real estate developers and investors use these loans to “bridge” a gap when purchasing or renovating a wide array of properties. Even businesses in other industries may take out a commercial real estate bridge loan if they purchase a new property.
Commercial Bridge Loan Highlights
Eligible Properties: Multifamily, Office, Retail, Hospitality, Industrial, and Student and Senior Housing in strong markets
Loan amount range: Minimum $1,000,000
Interest Rate: 5% or higher over index
Loan Term: 12 to 36 months. Extensions are possible
Amortization: Generally Interest-only with some exceptions
Maximum LTV: 780% of cost (LTC). Max stabilized LTV can vary, but generally up to 75%
Recourse: Non-recourse except industry-standard “bad act” carve-outs.
Prepayment: Minimum Interest period
Loan Exit: Permanent or takeout financing
Advantages of Commercial Bridge Loans
In addition to their maturities, commercial bridge loans offer several advantages compared to other loan options:
- Faster Underwriting: This makes it possible to close escrow faster. Being able to close faster might make this loan option attractive compared to other offers.
- Credit Requirements: Since commercial bridge loans are underwritten primarily on the basis of a property’s value and business plan, the credit requirements for these loans are much less stringent than the requirements for traditional long-term mortgages. Sponsors who have bad or poor credit may still be able to obtain this type of loan.
- Interest-Only Available: This allows developers to make interest-only payments while stabilizing a property, and defer the remainder of the loan balance until a property is sold or refinanced.
Disadvantages of Commercial Bridge Loans
While a commercial bridge loan’s advantages are helpful in many situations, there are a couple of disadvantages that borrowers should be aware of:
- Short Term: Bridge loans aren’t available for long terms, such as beyond three years. A more traditional loan is needed to obtain a longer term to maturity.
- Higher Interest Rates: Higher than those of long-term, traditional loans. Paying higher interest can add up over time, although the total interest over a short-term time frame may be minimal.
- Higher Fees: Origination, exit, and extension fees for these loans may be higher than fees for other loans.
- SBA 504 loans help businesses grow and create jobs by offering small businesses an avenue for affordable business financing. Through the 504 loan program, small businesses have access to long-term, fixed-rate financing, which they can use to expand or modernize their business.
- Non-profit corporations that work with the SBA and participating lenders, called Certified Development Companies (CDCs), provide financing to small businesses. CDCs are regulated and certified by the SBA.
SBA 504 Loan Highlights
Eligible Properties: Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage, Hotel/Motel, Restaurants, Daycare facilities, Assisted Living,
Loan amount range: Up to $5 million or $5.5 for manufactures and energy-efficient projects
Interest Rate: Pegged to an increment above the current market rate for 5-year and 10-year US treasury issues. See current libor rates
Loan Term: 10 or 20 years
Amortization: 10 to 30 years
Maximum LTV: Up to 90% LTV. Hospitality is limited to 85%
Minimum DSCR: 1.20x
Minimum Debt Yield: 7-8%
Recourse: Full recourse.
Prepayment: Prepayment penalty declines during the first 10 years to 0%. The loan is assumable and the prepayment penalty does not apply.
Collateral: The project assets that are being financed are used as collateral. The principal owners are required to produce personal guarantees.
Advantages of SBA 504 Loans
SBA 504 loans for commercial properties have several advantages that make the loans attractive in various situations:
- Fixed-Rate Loan: This allows small businesses to calculate their mortgage payments for the span of the loan.
- Low Down Payment Requirements: In most cases require 10% of the total project cost, including renovations and soft costs. Allowing small businesses to preserve cash for working capital.
- Long Terms: 10 or 20 years.
- Low-Interest Rates: Even when the fees and closing costs are included in the rate.
- Costs: Soft costs like legal fees, appraisals, environmental studies can be rolled into the loan.
Disadvantages of SBA 504 Loans
Even with their many advantages and overall flexibility, there are some disadvantages that come with SBA 504 loans. Some of the more noteworthy disadvantages are that:
- Availability: The loan program is only available for owner-occupied properties and is only available to small businesses.
- Requirements: Under SBA 504 guidelines, the business must create one job or retain an existing job for every $65,000 they receive through the program.
- Longer Application: The application process and underwriting take longer than a conventional loan, due to having three parties involved. Both CDC and the lender must agree to the term. SBA underwriting is done through a single office, which can create wait times. The underwriters are thorough and will question anything out of the norm.
- The SBA 7(a) loan program is the Small Business Administration’s primary way of helping small businesses secure financing. These are the most common types of loans that the SBA guarantees, and the administration guarantees tens of thousands of them each year. While businesses must meet strict criteria to qualify, many small businesses — including many real estate businesses — are eligible for SBA 7(a) loans.
SBA 7(a) Commercial Property Loan Highlights
Eligible Properties: Office, Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage, Hotel/Motel
Loan amount range: Maximum of $5,000,000
Interest Rate: Prime + 2.75%. See LIBROR rates.
Loan Term: Up to 25 years for commercial properties
Maximum LTV: 75% For Loans Over $150,000
Minimum DSCR: 1.25x
Recourse: Typically Full-recourse.
Prepayment: For loans with maturities of 15 years or more if prepaid during the first 3 years. (5% year 1, 3% year 2 and 1% year 3)
Guaranty Fees: Above $700,000=3.5% up to the 1st million: plus .25% on guaranty portion over $1 million.
Collateral: SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount on loans over $350,000. Personal guarantees are required for owners that have a 20% or more stake in the business
Advantages of SBA 7(a) Loans
SBA 7(a) loans’ features create significant advantages that make these loans attractive to eligible small businesses:
- Availablility: May be available even if other financing options aren’t. The SBA’s guarantee gives lenders more reassurance, so they’re more willing to underwrite these loans.
- Maximum Interest Rates: Set by the SBA, so businesses know they’ll pay a fair and competitive rate.
- Loan Amounts: Available in a wide range of amounts, and they can be underwritten as a traditional loan or a line of credit. Depending on the program, loaned amounts can range from less than $150,000 up to $5 million.
Disadvantages of SBA 7(a) Loans
Despite their many advantages, there are also some drawbacks to SBA 7(a) commercial real estate loans that make them unsuitable for certain situations:
- Requirements: Businesses must meet the SBA’s eligibility requirements, which often include a credit check. Not all businesses are eligible.
- Prepayment Penalty: Potentially unsuitable in situations where businesses expect to pay off or refinance a loan in just a few years.
- Personal Guarantee: Business owners are still personally responsible for the loans even though the SBA also guarantees a portion of them.
- Approval Process: Although these loans are assumable, the SBA’s approval process for a transfer of ownership makes assuming these loans somewhat cumbersome.
- Adjustable Rate: The most common 7(a) loan is a quarterly adjustable.
For commercial real estate investors, Fannie Mae Multifamily loans may prove to be a feasible way of obtaining lower costing financing. It is one of the largest sources of capital within this market in the U.S.
Utilizing the Fannie Mae lending platform allows individuals to purchase and refinance multi-family homes, including senior housing, student housing, 5 or more unit apartments, and numerous other styles.
Investing using this financial tool is an excellent opportunity for many, but it is important to understand what it is and how it works before getting started.
Fannie Mae Loan Highlights
Eligible Properties: Multifamily properties including student housing, apartments, affordable housing, assisted living, mobile home parks, and health care facilities.
Loan amount range: Minimum $1,000,000. Fannie Mae DUS program minimum is $3,000,000
Interest Rate: Fixed rates vary. Floating Rates from 2.30% over LIBOR. See current LIBOR Rates
Loan Term: 5 to 30-year fixed-rate loan terms are available
Amortization: Up to 30 years
Maximum LTV: 80%
Minimum DSCR: 1.25x
Minimum Debt Yield: 7-8%
Recourse: Non-recourse with standard “bad boy” carve-outs
Prepayment: Yield maintenance. No prepayment premium from final 90 days
Advantages of Fannie Mae Loans
The features of Fannie Mae Multifamily financing create several advantages that make the loans attractive in various situations:
- Student and military tenants: It is possible to have up to 80 percent of the tenants within these properties be either students or military tenants. If the concentration rises above this, though, the military or student housing programs from Fannie Mae (specific to these needs) must be used instead.
- Flexible terms: These loans provide borrowers with flexible terms to fit their specific needs. This generally includes amortization options for between 5 and 30 years.
- LTV allowance: Unlike other types of real estate requiring a much less flexible loan to value ratio, these loans allow for up to 80 percent. This applies to conventional properties and enables borrowers to secure more financing than they could otherwise.
- Property type flexibility: Aside from the noted student and military tenants, these loans can be used for properties such as senior developments, manufactured housing communities, and others, providing easier access all around.
Disadvantages of Fannie Mae Loans
There are a few disadvantages of Fannie Mae Multifamily programs. This includes the following:
- Strict occupancy requirements: Borrowers must ensure the property’s tenants meet any specific requirements set under the loan terms. That may include commercial space as well as student housing limitations.
- Borrower requirements: There are numerous borrower requirements in place depending on the loan type. This includes funding provided only to borrowers with ample experience they can prove. Additionally, borrowers must have a net worth that is at least equal to the amount that they are requested from the loan. Liquidity is also important and must be 9 to 12 months of debt service after any cash injections are made. There are credit score requirements as well (680 or higher) and there may not be any recent negative credit events for the borrower. Additionally, these loans are available to only single-asset U.S. borrowers who have proper U.S. ownership. It is possible to obtain these loans with indirect foreign ownership with proper structuring in place.
- Documentation: A range of documentation requirements are present on these loans. Due diligence reports and pre-closing documentation can take time to process, slowing down the process. There is no way to speed this process up, which may make it difficult for some property borrowers to navigate the process quickly. More so, this may make it more complex to borrow in some situations.
- Freddie Mac offers a diverse portfolio of loan products that can be used for the acquisition or recapitalization of multifamily housing. For multifamily projects that meet program requirements, Freddie Mac is often the preferred program regardless of the specific type of housing. It’s widely used to purchase and refinance small and large projects of different housing types.
Common Freddie Mac Multifamily Loan Terms
Each Freddie Mac program sets its own qualification requirements, but most multifamily loan programs have terms that fall within these general guidelines:Amount borrowed: $1 million+
Duration: 5 – 30 years for fixed-rate
Leverage: 80% loan to value maximum
Recourse: Non-recourse (basic carve-outs)
Prepayment: Often if repaid too early
Rate locks: Both early and extended available
Borrower requirements normally stipulate that the borrower must have a net worth equal to at least the full loan amount, along with minimum total liquidity of 10 percent of the amount borrowed (excluding retirement accounts).
Advantages of Freddie Mac Loans
The various multifamily loan programs that Freddie Mac offers have multiple features that make them attractive financing options:
- Flexible Terms: Ranging from 5 – 30 years.
- Non-Recourse: Applies to all principals of an organization.
- Specialized Multifamily Financing: For senior, student and affordable housing.
Disadvantages of Conventional Loans
Despite the multiple advantages that Freddie Mac multifamily housing offers, there are some drawbacks that make it undesirable for certain projects:
- Larger Properties Only: Doesn’t allow for financing of smaller (1-4 unit) properties
- Limited Options: Only a few multifamily loan programs that allow for mixed-use properties.
- Prepayment Penalties: If paid off early, fees are due.
- Rates: Fairly standard interest rates and LTVs.
- FHA loans offer some of the most generous terms of any commercial real estate loans. Their high allowed leverages, low interest rates and long available terms make HUD/FHA loans attractive to investors who are purchasing, building or renovating qualifying multifamily properties. Few other loan programs match what HUD and the FHA offer.
Advantages of FHA/HUD Loans
For qualifying multifamily properties, commercial HUD/FHA loans have many advantages:
- FHA Guarantee: The defining and most significant feature of HUD/FHA multifamily loans is the FHA’s guarantee. The guarantee allows lenders to relax their typical requirements, which results in more generous commercial loan terms for most programs.
- Leverage: The relaxed requirements allow investors to maximize their leverage. Many HUD/FHA loan programs allow loan-to-value ratios above 80%, and sometimes as high as 90%. The range is much higher than the typical 65-80% that conventional multifamily loans commonly allow.
- Amortization: HUD/FHA loan durations last anywhere from a few years to decades, depending on the specific program. Many programs (including even shorter ones) have amortization schedules that go out ~30 years, though.
- Size: HUD/FHA loans can range in value from a few hundred thousand up to millions. Several loan programs offer more than $10 million (sometimes much more) in financing.
- Interest Rate: The guarantee and longer amortization schedules allow lenders to extend somewhat lower interest rates. A loan’s exact interest rate depends on the program, borrower’s credit, property, and current market conditions. Most loans offer below-market rates when compared to comparable conventional loans.
- Non-Recourse: HUD/FHA loans are usually non-recourse (with standard carve-outs). This means investors themselves can’t be held responsible for the balance remaining on a loan.
Disadvantages of FHA/HUD Loans
Despite their many advantages, HUD/FHA loans do have some disadvantages too:
- Qualification: Only qualifying multifamily properties can be financed with HUD/FHA loans. While many different types of multifamily properties qualify (e.g. apartment, senior, student, medical multifamily properties), programs normally require that properties provide affordable housing. Using an FHA Multifamily Accelerated Processing (MAP) Lender can minimize the extra time required, but some extra time typically still is needed.
- Approval: Because loan applications for these programs must be approved by the FHA, underwriting takes longer than it does for conventional commercial real estate loans. This may be a consideration if trying to close on a property or start a renovation quickly.
- Prepayment: Most FHA loan programs come with prepayment penalties that discourage paying the loans off in the first few years (up to the first 10 years).
- Many life insurance companies underwrite commercial real estate loans, either individually or in cooperation with other life insurance providers. The purpose of these loans is to provide the life insurance company with some returns, while significantly mitigating their risk exposure through diversification. That purpose or risk mitigation is the underlying factor in virtually all aspects of these loans.
- If you are looking for a long-term and low-rate commercial real estate loan, a life insurance company might have the right financing for your project.
Life Insurance Loan Highlights
Eligible Properties: Multifamily, Office, Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage, Hotel/Motel
Loan amount range: Minimum $1,000,000
Interest Rate: Fixed rates vary.
Loan Term: 5 to 30 year terms available
Amortization: Up to 30 years
Maximum LTV: 70%
Minimum DSCR: 1.25 – 1.35x
Minimum Debt Yield: 8-10%
Recourse: Can be non-recourse, limited-recourse or full recourse.
Prepayment: Typical yield mantenance fee, Breakfunding or a Declining “step-down” premium
Advantages of Life Insurance CRE Loans
Life insurance commercial real estate loans have several advantages that make them attractive for properties that qualify:
- Fixed Interest Rates: Competitive rates that don’t change for the 15 – 30 year terms of these loans.
- Non-Recourse And Assumable: Providing individuals with protection and allowing the loan to transfer.
- No Limit: Access to millions, as there isn’t an official upper limit to the amount borrowed.
Disadvantages of Life Insurance CRE Loans
Life insurance commercial real estate loans also have disadvantages that render them unable or undesirable when financing some properties:
- Grade A: Often only available for newer properties in good repair, and not for properties outside of Class A investment grade.
- LTV & DSCR: Some of the most conservative LTV and DSCR requirements for borrowers to meet.
- Prepayment Penalties: Frequently have prepayment penalties and aren’t offered for shorter terms that would bypass these penalties.