Do you have a Commercial project that requires financing? Here are a few basic guidelines that you need to know…
Examples of Property Types:
- Multi-family Residential units
- Mixed Use
- Apartment Buildings
- Office Buildings
- Single Purpose
- Shopping Malls
Loan Amounts & Terms:
- Usually commercial lenders have a minimum loan amount of $1,000,000 in their policy guidelines, however most would look at $500,000.
- The loan-to-value ratios will range from 50% to 90% depending on the property, location, loan amount, and whether for purchase or refinance. The primary determining factor for maximum loan amount is the 3rd party rental income/debt servicing, depending on the nature of the property, or DSCR.
- What is the DSCR? The Debt-Service Coverage Ratio; a DSCR greater than 1 means the entity, whether a person, company or government, has sufficient income to pay its current debt obligations. A DSCR less than 1 means it does not.
- Lenders typically look for DSCR of 1.20 for small apartment buildings to 1.50x coverage for ‘riskier’ deals. When the property is leased to a 3rd party or an ‘arms length’ tenant, the DSCR is based on the lease income received, less a vacancy and non-recoverable expense allowance.
- For owner occupied properties the DSCR is based on the operating company’s EBITDA (Earnings Before Interest, Taxes, Depreciation/Amortization) divided by the annual loan payments.
- Rates are based on commensurate risk, collateral quality, and scope of project.
- Amortizations available up to 30 years.
- Combination 1st & 2nd mortgages are available.
- Fixed interest terms can be from 1 to 10 years.
- Loan fees can vary, but are usually in the range of 0.50 to 2% of the loan amount, depending on the size & scope of the loan.
- Often, a refundable deposit on the lender’s fee is required once the lender has issued a Letter of Interest. Upon receipt of the deposit, the lender follows through with full underwriting and due diligence. Should the lender not be able to provide an approval in line with the proposal, the fee is typically fully refunded.
- Once the full underwriting process is complete, the lender will issue a formal offer of financing that will outline the approved loan amount, rates, fees, and any pre-funding conditions, and the application fee will be deemed earned.
- The remainder of the fees are usually collected at closing.
- Smaller loan amounts can be arranged, but may be subject to higher rates. If you have other business you can offer the bank, it may help to get your rate lower. As noted below, given the costs for third party reports that are required, these can add up to a high amount relative to the property value on smaller deals.
Factors in Risk Assessment:
- Prescribed capitalization rate. What is a cap rate? The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%. In general terms, the higher the cap rate, the higher the risk.
- Location & population.
- Quality of tenant income; ie duration, consistency.
- In the case of owner occupied properties the operating company’s financial statements showing balance sheet strength and history of cash flow.
- Strength of principal borrowers; ie other assets, other income, up-to-date with tax filings.
- Credit bureaus of principal borrowers.
Outside the Box:
- What happens if your project doesn’t fit into the lending guidelines? This is where private financing can help. Yes, it will be more expensive than regular intuitional lending, but private financing can be an effective tool to achieve the results you need when institutional financing is not available. Having an exit strategy is the key to success in these situations. Have a plan in place of how you will refinance in the future to lower the long term repayment costs. Whether the issues were credit related, cash flow, lack of tenants, or timing in the project, set goals and timelines to rectify those issues, and review again in a year to see what has changed, both in circumstance & available lenders.
- Commercial appraisal. These are more expensive than their Residential counterparts. Cost will vary depending on the project, and will start at approximately $3,000 +/-.
- Phase 1 Environmental Report. Cost will vary depending on the project, and will start at approximately $2,000.
- Purchase contract documents.
- Statement of Net Worth (application) from principal borrowers.
- Last 2 year’s tax returns and Notices of Assessment.
- Last 2 year’s company financial statements.
- Rent roll, copies of leases, and other tenant information required by lender.
- Corporate documents confirming ownership (including organizational charts for complex structures).
- For construction; project overview, cost breakdown/budget, appraised value “as if complete,” builder contracts, and New Home Warranty information.
- For construction deals there is also normally a Quantity Surveyor required to review the budget and monitor draws and progress, at the cost of the Borrower.
- For existing buildings that are older there may also be a building inspection report required but this in on the minority of the deals.
If you have a commercial property or project that you need financing for, please email me your proposal.
We are here to provide lending options for you.