Commercial Real Estate Loans & Loan Rates
Commercial Real Estate Loans, Commercial Loan Rates: Investment real estate loans including Mixed-Use, Office, Medical Office, Retail, and Industrial
There is no question that financing investment real estate is harder today than it has been in the past. Lenders are more cautious then ever about vacancy rates, historical financials, tenant turn-over, market conditions, current rental rates as compared with market, tenant financial strength, and Borrower / Guarantor fall-back liquidity, cash-flow and assets. Financing still exists for commercial investment properties, but only for those that are structured properly on the front-end so that they mitigate most of the Banks typical concerns. We have placed many investment properties with lenders, including those with high vacancy, short-term leases, and those in markets that are struggling. The key to our success has been our strong underwriting and work on the front-end in mitigating the concerns the lenders will have. Being former lenders that are experienced in how lenders process these requests, we know what our lenders are looking for and what we need to do on to overcome the hurdles that otherwise might doom a loan request. The lending sources we utilize for these transactions are as follows:
a) Traditional Banks – the number of traditional bank lenders providing financing for investment real estate these days is much less than it once was. However, we have a large number of community banks, regional banks, and national banks that will consider providing investment real estate financing under the right situations. Typical advance rates these days vary, but are typically no higher than 75% and in some cases start even lower than that. The advance rate will largely depend on the condition of the property and the quality of the tenants in the property. Cash-out refinances are hard to achieve, and when they do happen it is typically with loan to values at or in some cases substantially lower than 65%. Also, the cash-out often has to have a good purpose, either for improving the property, specifically investing into something else, etc. Loan terms may match the terms remaining on the leases, but as a standard rule terms are usually two to five years. Amortizations are usually no greater than twenty-five years, and in some cases do not exceed twenty-years. Interest rates vary quite a bit depending on the quality of the transaction, but interest rates for triple-A rated or better leases tend to start as low as the 4% range and for higher risk properties are in the mid 6% range. We have the right solutions for our clients and typically know relatively quickly after taking on a transaction whether it can be done at a traditional bank.
b) Insurance Companies – We work with insurance companies that look to provide lending on typically Triple-A or better rated tenanted leases, centers, office buildings, or industrial properties. Some companies just require the centers to be anchored by Triple-A tenants while other companies require the majority or whole project to be Triple-A tenants. Terms vary depending on the term on the lease and the program, but typically run from ten to twenty years, but there are some programs as short as five years. Interest rates tend to be in the 4% to 5% range, depending on the loan term and the strength of the tenants. Amortizations are typically between twenty and thirty years. Insurance companies typically do not advance more than 65% and in some cases 70% loan to value on purchases and refinances with no cash-out. On cash-out refinances, loan to values typically need to be less than 65%, and not all insurance companies will provide cash-out. Using insurance companies is a great way to put a solid asset with good leases into a long-term loan that does not need a bunch of monitoring or constant renewals.
c) Bonding of Leases – We have a program available to us where we can get bonds issued instead of traditional lender financing for Triple-A rated leased properties. The property has to be 100% occupied by one or multiple Triple-A rated leased tenants. The Bond amount is determined by taking the remaining term available on the lease, the rental amount, and the interest rate assigned to the bond, and then figuring how much debt the property can support without exceeding a debt service coverage ratio of 1.05x. If interest rates are attractive or rental rates strong, we have seen up to 100% loan to value bonds get issued. But typically bonds end up between 70% and 85% loan to value, largely dependent on the remaining terms on the lease(s). The term of the loan will match the remaining term on the lease. And cash-out is available up to the maximum available under the bond as determined above. Typical interest rates are in the 5% to 6% range depending on the credit quality of the lease and the market demand for that tenant. By bonding properties a Borrower can borrow or cash-out more than would be allowed under traditional financing methods at a solid interest rate on a long-term deal. Due to penalties associated with the bonds, it has to be a property the Borrower plans to hold long-term with the hope of just having the property pay for itself by maturity. There are also requirements the lease must have in it. Many leases already have those requirements in them, but in the off chance they do not, sometimes a lease modification has to be done to get a property to qualify under the program. However, we have found tenants are typically willing to work with Borrowers on such a modification.
d) Private Lenders – We have many private lenders willing to provide financing for investment real estate loans. These lenders are conservative and are looking for performing properties. Interest rates are quite a bit higher than traditional bank rates, currently between 8% and 16%. Also, advance rates are typically conservative and will not exceed 65% of the lesser of value or cost. In some cases cash-out refinances are allowed, but typically when that occurs the loan to value is quite a bit below 65% and the Borrower has to have a good use for the money. Terms vary widely depending on the program from one-year to five-years, and some loans are interest only while others will be amortizing sometimes over as much as thirty-years.
e) Hard Money Lenders – We have hard money lenders looking to put high risk capital in place on transitional properties. Often times these are storied properties where the Borrower needs capital for a short-period of time to allow for a stabilization of the property or for some work to be completed. In addition, these lenders are often willing to fund note purchases as well as straight mortgage debt. These lenders won’t typically fund more than 65% of total cost, without regard to existing or end value, and are typically providing that funding on a short-term one to two year basis. However, additional funding can often times be available if there is outside collateral to pledge. In almost all cases the loans are interest only with interest rates between 12% and 18%, and high loan fees between 2% and 6%. All of the lenders we work with underwrite each property looking at the end game and the ability of the Borrower to refinance that property into more traditional financing upon maturity of the Hard Money loan. We do not work with lenders that are underwriting these loans on the front-end with hopes of taking the properties back. We typically will not recommend a loan for Hard Money unless we are confident a plan is in place where we could get replacement financing done once the property is stabilized or repositioned.