Announcement

Collapse
No announcement yet.

Mortgage Options for commercial realestate

Collapse
X
 
  • Time
  • Show
Clear All
new posts

  • Mortgage Options for commercial realestate

    I am looking to purchase/build a building that I will occupy and possibly rent out the remaining space. Other than the banks what are the other available options to get a mortgage. What LTV can you get financing for projects in 3-5m range?

    Thanks

    HI

  • #2
    Hard money loans from funds and crowdfunding websites.
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

    Comment


    • #3
      On the topic of mortgages I'm interest in what happens when I have to renew my commercial mortgage. Let's say I have a cap rate of 7% and I'm borrowing at 4.5% 10 year fixed rate with 25% LTV at the onset (assume amortization of 30 years). Let's say in 10 years we are in a very different rate environment and mortgage rates are 7.5%. Now I'm no longer 25% LTV but the math still isn't great for myself or for my renter (let's assume this is a single tenant triple net leased building for simplicity). Was I raising rent all along in conjunction with interest rate increases and do I try to align the lease renewal options with my mortgage renewal period?

      Just trying to figure out how this process works. Would love to dive into some online reading on this.

      Comment


      • #4
        There are a variety of other options available, but the first question is what is your reason for asking?  Are you light on cash and looking for options that will allow for a greater LTV or that would require less paperwork?  There is private capital available from a variety of sources (PE, Family office, etc.).  At the ~$5M range you're also getting into the ballpark where the life insurers/pension funds will finance (typically accessed through a commercial mortgage broker).

        For straightforward transactions in that price range, typically your best options are simply to go through your local banking institutions.  If for some reason you want to avoid that (underwriting, LTV requirements, etc.) then look towards the private lenders who will have more lenient terms and requirements, with a slightly escalated rate (~+1-1.5%).

        Comment


        • #5
          Thanks for the feedback. My project is in its early stages and I am trying to come up with a budget. The bank that I have been in touch with says they can do 85% LTV but may have a 7yr reset. I am fairly unfamiliar with the commercial mortgage landscape and trying to explore possible options. At 15% a 3m project requires 450k down payment vs 750k for a 5m project. I am building up that down payment and the available options and timeline may determine the project scope.

          Comment


          • #6




            On the topic of mortgages I’m interest in what happens when I have to renew my commercial mortgage. Let’s say I have a cap rate of 7% and I’m borrowing at 4.5% 10 year fixed rate with 25% LTV at the onset (assume amortization of 30 years). Let’s say in 10 years we are in a very different rate environment and mortgage rates are 7.5%. Now I’m no longer 25% LTV but the math still isn’t great for myself or for my renter (let’s assume this is a single tenant triple net leased building for simplicity). Was I raising rent all along in conjunction with interest rate increases and do I try to align the lease renewal options with my mortgage renewal period?

            Just trying to figure out how this process works. Would love to dive into some online reading on this.
            Click to expand...


            Well your scenario probably isn't the best hypothetical.  Typically on a 7 cap STNL property, there is likely plenty of term remaining on the base term and several renewal options with predetermined rates.  The rental rate and increases are likely already laid out in the lease terms for the foreseeable future.  That's why you pay such a premium for those properties; they have long term predictable cash flows backed by strong credit worthy tenants.  So the answer to the first part of the bolded above is no.  The rent was increasing (or perhaps staying flat) per whatever the lease stated, not based on whatever you want to charge them.  As for the second part, the answer is also no.  The last thing you want to have happen is be staring down the barrel of a significant rate increase and potentially having a vacant building.

            The reality is that if you're using anything but fixed rate financing, you need to be proactively managing your debt service.  You should never find yourself in the scenario you described.  You typically won't see people get to the balloon on their debt.  Hypothetically if you had a 10/20 loan on your property, you should be refinancing that long before you get to the ten year balloon (like 5-7 years in).  That way you're rolling your balloon out another 5 - 7 years.  This is especially true in a rising interest rate environment.  In your scenario, you would have known for years that you were going to be facing a higher interest rate and you should have refinanced, rolled the balloon out (or moved to a fixed product), and taken a small interest rate hike rather than wait til the very end and have to eat a 3% rate hike.  There are a lot of variables and other things to keep in mind (how much term is left on the lease with your tenant which will have a big impact on your ability to refinance for example).

            If for some reason you did end up in a scenario like the one you described, you wouldn't be totally screwed though.  You would have paid down significant principal on your loan (commercial loans are rarely 30 years, predominately they're 20 year ams).  You could refinance the remaining principal into a new loan which would significantly reduce your debt service despite the rate increase, and you'd also presumably have some rental increases in the lease to help offset it further.

            Comment


            • #7




              Thanks for the feedback. My project is in its early stages and I am trying to come up with a budget. The bank that I have been in touch with says they can do 85% LTV but may have a 7yr reset. I am fairly unfamiliar with the commercial mortgage landscape and trying to explore possible options. At 15% a 3m project requires 450k down payment vs 750k for a 5m project. I am building up that down payment and the available options and timeline may determine the project scope.
              Click to expand...


              85 LTV is about as good as you'll find right now.  There are some private sources that would possibly allow you to get to 90 or possibly even higher, but most are going to come with a significant rate increase over what the bank is proposing.  As for the balloon, they're pretty typical in commercial financing.  I'd say only about 10% of the financing I see is fixed.  As I stated above, you would just need to be proactive in managing that debt and be sure to refinance well before you get to that 7 year deadline.  We're in a rising interest rate environment, so I would anticipate a higher rate when you do refi.

              Given that you are going to occupy the space, you could always look at SBA financing.  That would allow you to get to 90 LTV with good rates, but it does add a lot of red tape to jump through and can encumber the property a bit (you're required to occupy at least 51% of the building).

              Comment


              • #8
                The private lenders we have approached have now started to ask a 1.5-2% extra interest over banks.

                Small to medium banks are more willing to loan nowadays to small owners of commercial business and real estate than large banks. But many of them run into a roadblock at around $5M and if the project is $7.5-10M, they need a second bank or additional SBA loan, which increases complexity.

                Most banks don't do a 30 year commercial loan. Many start out with a 5 year fixed and balloon later. As stated, you want to do a refinancing by year 3.5-4 to a fixed 10-15 year rate. By paying down some principal and hopefully with appreciation of the property value, the next loan is on favorable terms.

                Comment


                • #9







                  On the topic of mortgages I’m interest in what happens when I have to renew my commercial mortgage. Let’s say I have a cap rate of 7% and I’m borrowing at 4.5% 10 year fixed rate with 25% LTV at the onset (assume amortization of 30 years). Let’s say in 10 years we are in a very different rate environment and mortgage rates are 7.5%. Now I’m no longer 25% LTV but the math still isn’t great for myself or for my renter (let’s assume this is a single tenant triple net leased building for simplicity). Was I raising rent all along in conjunction with interest rate increases and do I try to align the lease renewal options with my mortgage renewal period?

                  Just trying to figure out how this process works. Would love to dive into some online reading on this.
                  Click to expand…


                  Well your scenario probably isn’t the best hypothetical.  Typically on a 7 cap STNL property, there is likely plenty of term remaining on the base term and several renewal options with predetermined rates.  The rental rate and increases are likely already laid out in the lease terms for the foreseeable future.  That’s why you pay such a premium for those properties; they have long term predictable cash flows backed by strong credit worthy tenants.  So the answer to the first part of the bolded above is no.  The rent was increasing (or perhaps staying flat) per whatever the lease stated, not based on whatever you want to charge them.  As for the second part, the answer is also no.  The last thing you want to have happen is be staring down the barrel of a significant rate increase and potentially having a vacant building.

                  The reality is that if you’re using anything but fixed rate financing, you need to be proactively managing your debt service.  You should never find yourself in the scenario you described.  You typically won’t see people get to the balloon on their debt.  Hypothetically if you had a 10/20 loan on your property, you should be refinancing that long before you get to the ten year balloon (like 5-7 years in).  That way you’re rolling your balloon out another 5 – 7 years.  This is especially true in a rising interest rate environment.  In your scenario, you would have known for years that you were going to be facing a higher interest rate and you should have refinanced, rolled the balloon out (or moved to a fixed product), and taken a small interest rate hike rather than wait til the very end and have to eat a 3% rate hike.  There are a lot of variables and other things to keep in mind (how much term is left on the lease with your tenant which will have a big impact on your ability to refinance for example).

                  If for some reason you did end up in a scenario like the one you described, you wouldn’t be totally screwed though.  You would have paid down significant principal on your loan (commercial loans are rarely 30 years, predominately they’re 20 year ams).  You could refinance the remaining principal into a new loan which would significantly reduce your debt service despite the rate increase, and you’d also presumably have some rental increases in the lease to help offset it further.
                  Click to expand...


                  Thanks, that's really helpful.

                  Comment


                  • #10
                    You can also take on partners or use private money. Good luck!

                    Comment


                    • #11
                      Where to find banks that will refi to fixed 10-15 year loans?

                      I have some RE loans 5/5 ARM over 25 yr @ ~4.5% due to reset in 2019-2022, would love to lock in longer term.

                      Comment


                      • #12
                        Most banks will refinance to 10-15 year fixed loans. Are you having trouble finding that option? Especially the 15 year. That must be the second most popular mortgage out there.
                        Helping those who wear the white coat get a fair shake on Wall Street since 2011

                        Comment


                        • #13
                          Yes. I’m asking around local banks. Have 6 loans total, 5 reset in 2019-2022. They all will payoff in 13 years (5/8/10/11/13 years).

                          Love to lock 3 into 15 year loans. PNC Suntrust local credit union...all working on it. Any national lenders?

                          Comment


                          • #14
                            My 2c:

                            It could go on for another few years, but I don't want to be holding debt when the dancing stops.

                            I think most CRE at anything above 50% LVR is orders of magnitude more risky than unlevered land.

                            I would be more worried about loan terms than squeezing out 5% more leverage. At 85% LVR, the banks will get edgy about your loan before the 70% and so on.

                            If you are pulled on a 3-4M loan in a recession, you won't be able to raise more capital, get replacement leverage or sell your property.

                            I would rather wait for a recession and buy liquidated that is untennanted.

                            Comment


                            • #15
                              WCICON24 EarlyBird
                              Thank you for the feedback. I saved some money before for downpayment but saved aggressively since I started the thread. I have the 15% and by the end of this year can probably get to 20%. However I do want to move my office from the current location as soon as possible and I am assuming it takes 18-24 months to get the whole process completed. The land is roughly 20% of the total cost and any bank would most likely want me to put the downpayment to acquire the land before they start funding it.

                              I did consider waiting for a recession but if I am going to occupy this property as a tenant and landlord for at least the next 20 years if not more, waiting for a downturn might just be equivalent to holding your funds to invest waiting for a market pullback which may not always work.

                              There is apprehension and starter inertia on putting together a project of this magnitude, but if it can be done reasonably levered with out blowing the budget, long term prospects are good both for the property itself and the business growth that will follow.

                              Comment

                              Working...
                              X
                              😀
                              🥰
                              🤢
                              😎
                              😡
                              👍
                              👎