Commercial Mortgages

Commercial mortgages are usually not done by residential mortgage lenders. Below are various commercial guidelines I have seen over the years to give you an idea of what you might expect. Call a commercial mortgage lender for current details.

Possible guidelines:

  • Loan-term: generally 10-25 years amortization.
  • Fixed-rates are possible, ARM loans are more likely.
  • Non-recourse, except for certain industry-standard carveouts.
  • Assumable (with certain stipulations).

Challenges:

  • Loan may be closed to prepayment in the early loan years.
  • Prepayment fees may be charged.
  • Many times the property financed must be “income producing”.
  • Reserves may be required for taxes, insurance, and major property expenditures

Possible guidelines for smaller commercial loans:

  • Loan size: $1 million to $5 million.
  • Property types: Multi-family, industrial, R&D Flex, office, retail, manufactured home communities, and self-storage.
  • Loan to value (LTV): Up to 75% LTV; will consider up to 80% on multi-family and manufactured home communities.
  • Minimum debt coverage: Minimum of 1.25x for multi-family, industrial, anchored retail, and manufactured home communities; 1.30x on other retail, R&D Flex, office, and self-storage properties, based on underwriting criteria.
  • Prepayment Typically permitted after a 2 to 3-year lockout. Prepayment without penalty permitted during last 3 months of term. Prepayment may also be permitted after lockout period with prepayment fee to be the greater of a yield maintenance formula or 1% of amount prepaid.
  • Closing process: Typically 45 to 60 days from receipt of a complete application from borrower.
  • Assumption: One-time assumption fee of 1% for qualified buyers.
  • Amortization: 15- to 30-year schedules available on most transactions, subject to underwriting criteria.
  • Rate lock: Available upon receipt of complete application, subject to borrower qualification.

Possible guidelines for larger commercial loans:

  • Loan Size $5,000,000 to $250,000,000.
  • Property Types Multi-Family, Industrial, R & D Flex, Office, Retail, Manufactured Home Communities, Hotels, Senior Housing, and Self-Storage.
  • Interest Rate Fixed interest rates set at market spreads over corresponding Treasuries, depending on property type and underwriting criteria.
  • Minimum Debt Coverage Minimum of 1.20x for Multi-Family, Industrial, R & D Flex, Office, Retail, and Manufactured Home Communities. 1.30x on Self-Storage. 1.40x on Hotels.
  • Prepayment Typically permitted after a 2 to 3-year lockout. Prepayment without penalty permitted during last 3 months of term. Prepayment may also be permitted after lockout period with prepayment fee to be the greater of a yield maintenance formula or 1% of amount prepaid.
  • Closing Process Typically within 60 days from receipt of a complete application from Borrower.
  • Assumption Yes, two times to qualified buyers approved by Wells Fargo for a 1% assumption fee.
  • Amortization 20 to 30 year schedules available on most transactions, subject to underwriting criteria. Fully amortizing loans are also available.
  • Rate Lock Available upon receipt of complete application, subject to Borrower qualification.

What Type Of Borrower Is Best Suited To A Commercial Loan?

A borrower who anticipates holding the property long-term, without planning major changes other than routine tenant rollover and maintenance activities. A borrower anticipating a substantial modification of the property should not pursue a securitized loan, but a borrower who might sell the property later in the loan term to a qualified buyer is a potential candidate since the loan provisions permit assumption by a qualified new borrower.

The borrowing entity should be a Special Purpose Entity (‘SPE’). An SPE holds only one asset, and that one asset is the property subject to the lender’s lien.

An SPE can take many forms:

  • Limited Partnership
  • Limited Liability Limited Partnership
  • General Partnership
  • Limited Liability Corporation (LLC)
  • Corporate
  • Trust

Except on a case-by-case basis, other ownership forms cannot accommodate the SPE criteria. Secured loans to these entities may possibly be arranged on a case-by-case basis including any loan under $5 mm.

  • Individuals
  • Tenants in Common (on a limited basis)

Required Items For Commercial Loans

Retail, Industrial Or Office Properties

(The need for items #9-12 will vary according to each situation)

  1. Current rent roll including:
    • Square Footage of units
    • Lease abstract details such as:
    • Escalations, commencement & expirations, add-ons, description of tenant, Description of any added rent that the tenant is responsible for (In addition three years of historical data would be ideal)
  2. Complete Income/Expense Statement On The Property Including:
    • Annual property taxes
    • Insurance
    • Water/Sewer
    • Fuel
    • Electricity
    • Maintenance/Repairs
    • Management
    • CAM
    • Leasing commissions, tenant improvements
  3. Complete, detailed physical description along with site plan or property survey.
  4. If an acquisition, provide copy of fully executed contract of sale.
  5. If refinance, price originally paid for property, date of purchase and summary of current financing.
  6. Photos, if available.
  7. Summary of current financing (refinance only) including:
    • Current lender
    • Current principal balance
    • Current interest rate
    • Current monthly payment
    • Due date
    • Prepayment penalty information
  8. Information on management company, if separate from ownership.
  9. Current financial statements
  10. Current business financial statement (where applicable)
  11. Last two (2) years’ personal tax returns (where applicable)
  12. Last two (2) years’ business tax returns (where applicable)