What Investors Should Know About Commercial Real Estate Loans

Your commercial real estate transaction does not close unless the loan is approved. You can also improve the cash flow if the interest rate for the loan is low. So the more you know about commercial loans the better decision you can make about your commercial real estate investment.

Loan Qualification: Most of you have applied for a residential loan. You provide to the lender with W2's and/or tax returns. In general the more income you make the higher loan amount you qualify. You could even borrow 100% of the purchase price if your income or stated income is strong. For commercial loan, the amount of loan the lender will approve is based on the rental income of the property, not your personal income. So the more rental income the property generates, i.e. the higher the CAP rate, the higher loan to value (LTV) the lender approves. If you buy a vacant commercial building, you will have difficult time getting a loan as it does not have any rental income unless you plan to occupy it for your business.

Loan to Value: Commercial lenders tend to be more conservative about the loan to value. Most commercial lenders loan up 75% of the value of the property. The following is just a rough guideline for LTV based on the CAP rate as the actual calculation is beyond the scope of this article.
CAP ----- LTV
8% ----- 75%
7% ----- 67%
6% ----- 55%
5% ----- 45%
Lenders will only loan you the amount such that the income after expenses, i.e. net operating income is at least 20-25% more than the annual mortgage payment of the property. Or another words, the loan amount is such that you will have positive cash flow equal to at least 20-25% of the mortgage payment. So if you purchase a property with low CAP rate, you will need more down payment. This is so true for commercial properties in California as the CAP rate is in the 5% range. Commercial real estate is intended for the elite group of investors so there is no such thing as 100% financing.

Interest Rate: The interest for commercial is dependent on various factors


Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But you borrow $3M, your rate could be only 5.9%! In a sense, it's like getting lower price when you buy an item in large volume at Costco.


Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it's much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, everyone needs a roof over their head no matter what so the rate is lower for apartment.


Age of the property: loan for newer property will have lower rate than dilapidated one. To the lender the risk factor for older properties is higher so the rate is higher.


Area: if the property is located in a growing area like Atlanta metro the rate would be lower than a similar property located in the rural declining area of Arkansas. This is another reason you should study demographic data of the area before you buy the property.


Your credit history: similarly to residential loan, if you have good credit history, your rate is lower.


The lenders you apply the loan with: Each lender has its own rates. There could be significant difference, e.g. over 1%, in the interest rates. So you should work with someone specialized on commercial loans to shop for the lowest rates.


Prepayment flexibility: If you want to have the flexibility to prepay the loan then you will have to pay higher rate. If you agree to keep the loan for the term of the loan, then the rate could be 1% interest lower. See more on conduit loan.

Prepayment Penalty: In residential loan, prepayment penalty is often an option. If you don't want it, you pay higher rate. Most commercial loans have prepayment penalty. The prepayment penalty amount is reduced or stepped down every year. For example on a 5 year fixed rate loan, the prepayment penalty for the first year is 5% of the balance. It's reduced to 4% and then 3%, 2%, 1% for 2nd, 3rd, 4-th and 5-th year respectively.

Loan Fees: In residential mortgage, lenders may offer you a "no points, no costs" option if you pay a higher rate. Such option is not available in commercial mortgage. You will have to pay between ½ to 1 point loan fee, appraisal cost, environment assessment report fee, and processing/underwriting fee. A lender normally issues to the borrower a Letter of Interest (LOI) if it is interested in lending you the money. The LOI states the loan amount, interest rate, loan term and fees. Once the borrower pays all the fees, the lender starts underwriting the loan. If the lender approves the loan and you do not accept it then the lender keeps all the fees.

Loan Types: While there various commercial loan types, most investors often encounter 3 main types of commercial loans:


Business Administration or SBA loan. This is a government guaranteed loan intended for owner-occupied properties. When you occupy 51% or more of the space in the building (gas station is considered an owner-occupied property), you are qualified for this program. The key benefit is you can borrow up 90% of purchased price.


Portfolio loan. This is the type of commercial loans the lenders loan to you using their own money. Lenders are often more flexible because it's their money. For example United Commercial, Citi Bank or Cathay Bank is a portfolio lender.


Conduit loan. It's harder to explain to an average consumer or investor what a conduit loan is. It's easier identifying it by its characteristics or just simply ask the lender.


The rate is often lower. It is often around 1.2% over the 5 or 10 year US Treasury rates compared to 1.85-3% over the 5 or 10 year US Treasury rates for portfolio loan. This is the key advantage of conduit loan.

Conduit lenders only consider big loan amount, e.g. at least $2M.

Lenders require borrower to form a single-asset entity, e.g. Limited Liability Company (LLC) to take title to the property. This is intended to shield the property from other the borrower's liabilities.

If the borrower later wants to sell the property before the lock out period expires, the new buyer must assume the loan as the seller can not pay off the loan. This makes it harder to sell the property because the buyer needs to come up with a significant amount of cash for the difference between the purchase price and loan balance. Furthermore, the lender could reject the loan assumption application for various reasons as there are no incentives for it to do so. If you are a 1031-exchange buyer, you may want to think twice about buying a property in which you must assume the loan. Should the lender reject your loan assumption application, you may end up not qualifying for the 1031 exchange and have to send to Uncle Sam a big capital gain check. This is the hidden cost of conduit loan.


Even when you are allowed to prepay the loan, it costs an arm and a leg if you want to prepay the loan. The prepayment penalty is often called Yield Maintenance or Defeasance. Basically you have to pay the difference in interest between the note rate of your loan and the current US Treasury rate for the remaining years of the loan! This amount is often so high that the seller normally requires the buyer to assume the loan. You can compute the defeasance from defeasewithease.com website. Besides the defeasance, you also have to pay a hefty processing fee which is in the $50-60K range! These are another hidden cost of conduit loan.
Conduit loan may be the loan for you if you intend to keep the loan for the life of the loan that you agree to at the beginning. Otherwise it could be very costly due to its payoff inflexibility.


Lenders Coverage Area: commercial lenders would do business in areas they are familiar with. For example while Green Point Commercial does business in Northern California, it does not cover Fresno or Sacramento County. United Commercial Bank will only consider properties in California. Provident Bank does business in Arizona, California and Nevada. Silver Hill Financial covers all 50 states but has a one million dollar loan limit. Kennedy Funding does business almost anywhere but the rate is pretty high as it is a hard-money lender. GE Commercial Financing will only consider transaction with at least $5M loan.
Lenders Coverage Property Types: Most commercial lenders would only consider a certain types of properties that they are familiar with. For example Washington Mutual would do apartments and office buildings but not retail properties or gas stations. Citibank would not consider loans for single tenant retail properties. Westford Financial specializes on church financing. Comerica concentrates on owner-occupied properties.

Conclusion:

Commercial loans are a lot more complex than residential loans. As an investor, you should employ a professional commercial loan broker to assist you with your commercial loan need. Chances are that you will end up paying lower interest rates, avoiding potential pitfalls and having a better chance to get the loan approved.

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What should investors know commercial real estate loans

Your commercial real estate transaction, if the loan is approved. You can also improve the cash flow if the interest rate on the loan is low. Than commercial loans the better decision you do on your commercial property investment.

Securities lending:

Most of you have a mortgage is applied. Give the creditor with W2 and / or tax returns. In general, income than do the highest amount of loan you are qualified.You could also borrow 100% of the purchase price, if your income or income is strongly indicated. For commercial loans, the loan amount, the creditors' committee is the income from the letting of property, not on personal income. Generate more income homes property, namely the higher the maximum rate approved, the loan exceeds the value (LTV) of the lender. If you buy an empty building trade, is in difficult times, always have a loan, because they have rental income, unless you plan toto occupy for your company.

Loan to Value:

commercial lenders tend to be conservative for the loan value. Most commercial creditors borrow up to 75% of property value. The following is only a guideline for the maximum LTV on the basis of the maximum rate than the actual calculation is beyond the scope of this article.
Zip LTV —–
8% —– 75%
7% —– 67%
6% —– 55%
5% —– 45%
Only financed the loan amount, so that the income afterCosts, ie, the net operating income of at least 20-25% more than the annual payment of a mortgage of the property. Or another words, the loan in order to have a positive cash flow of at least 20-25% of the loan is paid. Thus, if an item with Buy PAC lowest rate, you get lower down payment. This applies both to commercial property in California, when the maximum rate is 5%. Commercial Real Estate is designed for the elite group of investors, so there issomething like 100% financing.

Interest Rate: The commercial interest depends on various factors

Amount of loan: The mortgage on residential property, if you have less money to loan, ie corresponding to a loan, the interest rate is lower. If you borrow more money, ie a jumbo or super jumbo loan is the desire to be the highest rate. In the commercial mortgage, the opposite is the case! If you could borrow $ 200K loan rate to 9%. But it borrows $ 3M, its value could only 5.9%! In a sense,It is as always a lower price if a product in bulk at Costco.

Property: The interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is greater. When the night is excluded clubhouse, is much more difficult to sell, rent or out of respect to multi-tenant retail strip. The price of the house is lower than that of shopping. For creditors, each must have a roof over their heads, no matter what the rate of suchless for the apartment.

Age of property:

loan for the recent properties have a lower rate, like a derelict. The risk to the lender for large objects higher the rate is higher.

Area: if the property is lower in a growing area of metro Atlanta as the rate would be a similar property in the rural area of Arkansas is in decline. This is another reason you should study the demographics of the area before buying property.

YourCredit history: how to live the loan if you have good credit, the rate is lower.

Lenders contact with the loan:

Each creditor has its own rates. It could be a significant difference, for example, about 1%, rates of interest. To be with someone specializing in commercial loans of work for the lowest prices in the store.

Prepayment flexibility:

If the flexibility to prepay the loan then you must want to pay the higher rents. If you agreekeep the loan for the duration of the loan, the rate of 1% could reduce interest rates. More loan conduit.

Prepayment Penalty:

In the residential loan is a prepayment penalty of the amount is often an option. If you do not want to pay higher fares. Most of the commercial fees for early payment of the loan amount. Reduces the amount of prepayment penalties, the amount or down to increase every year. For example, on a 5-year fixed rate mortgages, the fees for an amount in the first year of 5% of the balance. E 'then reduced to 4% and 3%,2%, 1% for the 2nd, 3rd, 4th and 5th year.

Rents: In the residential mortgage may, lenders offer "no points, pay all costs" option if you have a higher rate. This option is not available in commercial mortgage. You need between ? to 1 point loan fee, appraisal costs, pay tax, assessment report and environmental transformation / subscription. A creditor problems, usually the borrower a letter of interest (LOI), if you're interested in lending the money. The LOIMember of the loan amount, interest rate, term of the loan and taxes. If the borrower pays all taxes, the lender underwriting the loan. If the lender approves the loan and keep taking it, it will be the provider of all taxes.

Types of loans: There are different types of commercial loans, investors are more often on 3 types of commercial loans:

Business Administration or SBA loans. This is a government-guaranteed loans for owner-occupied properties determined. If youtake a 51% or more of space in the building (gas station is considered residential property), which can benefit from this program. The main advantage is, you can buy credits to 90% of the price.

Loan portfolio. This is the type of loans commercial loans for lenders with their money. Lenders are often more flexible, because the costs on their own. For example, United Commercial, Citi Bank and Cathay Bank, a provider of portfolio.

Conduit loans.

It 'hard to explain,an average consumer or investor, which is a loan conduit. It is easier to identify its characteristics or simply ask the creditor.
The price is often lower. It is often about 1.2% above the 5 or 10 years U.S. Treasury prices compared to 1,85-3% above the 5 or 10 years U.S. Treasury rates for the loans portfolio. This is the main advantage of lending conduit.
Conduit lenders only consider large amount of credit, ie at least 2 million dollars.
Lenders require borrowers to form a single unit of activity, such as LimitedLiability Company (LLC) to obtain the property title. Thus the properties of other liabilities of the debtor will be protected.

If the borrower later wants to block the property before the deadline, the new buyer, the loan is not a seller may be useful for the sale to take over the loan. What makes it more difficult to sell the property because the buyer must be offset by a significant amount of money for the difference between the purchase price and loans. LendersThe application for approval of the loan has been dismissed for various reasons, there is no incentive for them to do. If you have an Exchange 1031 potential buyers, you can twice before buying a property in which you think should take over the loan. If the creditor rejects the assumption of a loan application, you may not ultimately benefit from exchange 1031 and have Uncle Sam to send a large capital gain to verify. This is the hidden cost of the loan conduit.
Even if you have the right to prepay the loan, which costsan arm and a leg, if you want to prepay the loan. The prepayment penalty is often called yield maintenance or defeasance.

Basically, you must pay the difference between the interest rate on the loan and note the current rate of U.S. Treasury for the remaining term of the loan! This amount is often so high that the seller is usually the buyer to assume the loan. You can calculate the defeasance Site defeasewithease.com. In addition to the defeasance, you alsoto pay a heavy fee, in $ 50-60K range! This is another hidden cost of the loan conduit.
Conduit loan is the loan for you if you intend to keep the loan for the duration of the loan that you agree from the outset. Otherwise, it could be very expensive due to the inflexibility of the payment.

Lenders Coverage Area:

commercial lender would do business in areas they are familiar. For example, while Greenpoint trade for their business practices in northern California,not to Fresno or Sacramento County. United Commercial Bank include only the properties in California. Provident Bank operates in Arizona, California and Nevada. Silver Hill Financial covers all 50 states, but has a credit limit of one million dollars. Kennedy Funding is doing business almost anywhere, but the speed is pretty high, since it is a lender owners. GE Commercial Finance in only operations with at least $ 5M loan.

Funders Coverage property types:

Most commercialLenders would only consider a certain number of characters that are unfamiliar. For example, Washington Mutual would be apartments and office buildings, but no buildings or retail gas stations do. Citibank not take into account loans for single-tenant retail properties. Westford Financial specializes in financing of the church. Comerica focuses on the properties occupied.

Conclusion

Commercial loans are much more complex than residential loans. As an investor, you shouldthe use of a professional commercial loan broker to help you with your discomfort commercial loan. Chances are good that you end up paying the lowest interest rates in order to avoid potential pitfalls and more with the opportunity to approve the loan.

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Commercial Real Estate Investors should know the jargon

Commercial Real Estate Investment is a new area for many real estate investors. Below is an alphabetical list of terms commonly used in this field.

Anchored tenants:

large national brand tenants, such as Albertsons, Longs Drug, Wal-Mart, which carry a lot of traffic to the mall.

CAM: Common Area Maintenance.

Coupled with fees CAM CAM. NNN leases for the duration see CAM charges to pay the money to cover property owners tenantTaxes, insurance and maintenance.

Cap rate:

return on capital invested in the first year after purchase. Wholesale price is the ratio of 1 years, the net operating income on the purchase price. The higher the maximum rate, the higher the rental income. For people who invest in the stock market, the maximum rate is the reciprocal of P / E ratio.

Cash on Cash:

annual return of your deposit without recognition. The first cash flow year divided by the initial payment,Payment.

Conduit loan: Also

known as trade directories backed securities (CMBS) loans, often with a lower rate than traditional loans, but call or a high prepayment penalty (defeasance or yield maintenance penalty) or lack of flexibility in payment .

CPD:

car, per day, or traffic on the road.

CPI:

Consumer Price Index. E 'is often used to increase the annual rent calculated to compensate for inflation.

Due Diligence

Period: the period after hospitalization is usually 15-30 days, in order to examine the buyer of the property. Buyer may cancel the contract at this time, for any reason and receive a full refund of deposit.

Certificate revocation: a letter of provision and signed by the tenant to confirm the rent and the current conditions.

Full Service Leasing:

Leasing, in which the tenant pays the additional costs that covers everything.

Gross income:

annual incomeCosts.

Lease agreement gross

lease, where tenants pay rent easily. Owner pays taxes, insurance and maintenance.

Total:

gross lettable area, or the total rentable area. This is the space that can be hired and receive rental income. It does not include facilities for utilities, elevator, etc.

GRM:

Gross Rent Multiplier for apartment. Relationship between the purchase price of annual income.

LLC:

Limited liability companies. A legal person of many investors toown commercial property.

LOI: Letter

of Intent / or interest are usually non-binding letter of offer is used to make an offer to purchase a commercial property too.

May Referee:

members of the Appraisal Institute trade experts.

Master lease rent

lease lease signed by the seller on the security space.

Mixed Use:

Commercial property with retail on 1st floor and apartments upstairs.

Triple net (NNN) lease:

lease is inTenants pay basic rent, plus property taxes, insurance and CAM charges. NNN Absolute NNN lease, leasing is that the tenants pay the fee for property management.

NOI:

net operating income. Annual income after all expenses (property taxes, ins., And maintenance), except for payments of the loan.

Hall:

Stand-alone building in a prime location in a large shopping center.

Pass-through:

see refund.

Percentage lease:

lease, the tenant pays base rent plus aPercentage of tenant income.

Phase I Report on

the inspection report that the evaluation for the soil / provision of environmental contamination. Is usually required by the lender, as part of the process of loan approval for a commercial property.

Phase II Report on the

inspection report for the soil, groundwater, underground. This test is more extensive analysis, which includes, to see if there is a pollution of soil and water.

Pro forma earnings:

the potential, namelyhigher income if the property is leased to 100%.

Proforma Cap rate:

hypotheses potential rate cap of 100% of the property is rented at market rents.

Repayment: The

share of property taxes, insurance and CAM charges paid by a tenant to the landlord, in addition to the rental base.

Luggage renting

from the seller to the buyer pays for the vacant positions until they are rented.

SBA Loan:

a government guaranteed loans for owner-occupied homes.

SNDA:

Subordination, non disturbance and attornment. There is an agreement, lenders approved by tenants: the new bond in 1 position requires signed; lender as owner of foreclosure, the lease contract as valid, provided tenant is in default.

TIC:

Tenants in common. One possibility for the small / self-directed IRA investors at a fraction of high-value property as tenants in common own.

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Tags: Commercial, Estate, Investors, jargon, should

Most Common Real Estate Terms – Part Two:Defeasance Articles

To reach the most common species, is at your property, to apply for a loan, also known as a loan. This process means that customers pay the money with the promise of a society as a bank or finance company. The company with the name of the bank or investors. The number, which is the establishment of an aid for the purchase of a property then returned at a certain time, which would be between the supplier and the customer then calledDebtor.

 It 'clear that financial conditions are uncertaineasier to understand. Because of these causes of communication problems between creditors and debtors often. There are still some confusion in the common technical language, support for the funding of a process without problems for both groups.

 No prepayment
 From the name itself, show that paying more for what is expected in a certain time before that decision is illegal. For the accommodation of real estate is permitted in periods. But houses would be a deficit forcommercialNon-Non-Profit Organization for the creditor. Therefore, it is not allowed and will be strictly observed. If in any case, the debtor to pay in advance, persistent, defeasance is the only alternative. This will be replaced with another well and gives money to those aspects of the borrower. The Ordinary is the equity.

 Bond Financing
 This refers to a type of financing is usually issued for a project. This type of financing is oftenworks better if the decision to stay or permanent financing.Bond-funded plans are generally in support of the government if the projects are connected to a local authority. It 'almost like a loan. The difference is, a bond is more of a debtor who gives not only an institution, but an entire market.

 Recourse
 This term refers to the financial needs of the system indicates that the action may be taken, as well as payments for the recoveryLoans homes that are not paid. In general, real estate, to be carried out without recourse basis.On the other hand, to remedy the current loan agreement effective. Thus, as time passes and the loan is not paid, the title will be questioned, and properties, too, that can provide the financing.

 Insurance Requirements
 Insurance requirements are a common aspect of the loan documents. These are the documents and testimonies in order to ensure that the fullProperties be bought and borrowed. Since the financing of the property itself is protected, the needs of insurance companies, which are an essential part ofprocess. Financier accounts for the preservation of property and, above all, the insurance coverage. Losses that may occur due to sudden disasters and natural disasters, such as burning, agitation, and anger of the financier as part of the debtor or the owner of the property. Therefore, the insurance documents are verycrucial.