Commercial Real Estate Loan
Highrise Investment Group can provide a commercial real estate loan for most types of commercial assets. This type of loan is secured by some form of commercial real estate (e.g. hotel, apartment complex, office complex, shopping center, medical office, etc.) that serves as an income producing business investment. The borrower or sponsor of commercial real estate property is typically a business entity. This entity is often referred to as a special purpose entity (SPE) since it is usually created for the sole purpose of investing in commercial real estate. The SPE is created through the formation of a corporation, trust, limited partnership, Limited Liability Corporation or other entity.
Upon loan execution, a mortgage is provided and secured by placing a lien on the property. A commercial real estate loan is provided either as a recourse or non-recourse loan. A recourse loan will require the principals of the SPE to back or guarantee the repayment of the loan. A non-recourse loan does not require the guarantee of the principals. If the loan goes into default, the lender cannot recover what is owed on the mortgage and is left with recovering any loss through the disposition of the property.
Commercial Real Estate Loan Repayment
A commercial real estate loan repayment term can be anywhere from one year to 20 years with an amortization period up to 30 years. Typical loan terms are provided at 3, 5, 7 and 10 year terms. Although, some loan terms are available for 15 and 20 year terms. In the instance of a 10 year term, monthly payments will be made over the ten year period with a balloon payment occurring in the last year. This balloon payment will include any unpaid balance of the original loan amount. To satisfy the remaining balance, the loan will need to be paid off through the sale of the property or refinanced before it matures.
Commercial Real Estate Loan Debt Coverage
The debt service coverage ratio often referred to as DSCR is a key metric used in underwriting a new loan. It is used to determine how well an income producing property will cover the recurring debt owed on the loan. It is calculated by dividing the net operating income (NOI) by the annual debt service.
As an example, a property with a $160,000 NOI and a $120,000 annual debt service will have a DSCR of 1.33. This metric will be used along with other metrics to determine what loan size is appropriate for the cash flow produced by the property. A commonly accepted value for DSCR is 1.20 and higher. A DSCR below 1.0 indicates a negative cash flow.
LTV or LTC?
LTV is loan-to-value, and LTC is loan-to-cost. Which one is used and what is it? LTV and LTC is a ratio used to determine the current level of financing for a property to the fair market value (LTV) or to the cost basis for the investment property (LTC).
When underwriting the purchase or refinance of a commercial real estate loan, a certain LTV percentage is usually given as a limiting factor to the loan amount provided. Construction loans are typically provided at a certain percentage LTC based on the total cost to construct the property. A commercial real estate loan is typically underwritten at an LTV/LTC percentage in the range of 50% to 80% LTV/LTC. Any higher leverage will typically involve additional mezzanine or equity capital.
For example, if a property is purchased for $20 million, it’s common to receive a loan for an amount up to 75% LTV. This means a loan of $15 million is provided, and the sponsor will need to contribute the remaining $5 million to acquire the property. Likewise, if a property is constructed for $15 million, it is possible to receive a commercial real estate loan for an amount up to 80% LTC. In this scenario, a loan of $12 million is provided, and the sponsor will need to contribute the remaining $3 million to cover the total cost of construction.
In general, a commercial real estate loan with a low LTV/LTC will receive the most favorable financing terms. The lower leverage reduces the risk for the lender since the sponsor is contributing more of their own equity into the property. The less equity you contribute to the investment property the more you will pay to get it financed.
Commercial Real Estate Loan Prepayment Penalties
Why is there a prepayment penalty on a commercial real estate loan? As with most things in life, it comes down to money. Most lenders want to preserve their anticipated yield on the issuance of a loan. In order to preserve this yield, a prepayment penalty is factored in to the loan when it is issued. Prepayment penalties vary depending on the length of the term and the lender issuing the loan.
A prepayment penalty is typically applied using a graduated scale from 5 to 1. On a 5 year pre-payment penalty, you might see the penalty written as 5-4-3-2-1. This means there is a penalty if the loan is paid off in each of the first five years. If it’s paid off in year three, the penalty will be 3% of the current loan balance. This penalty scale continues until you get to year six, and you have passed the penalty period.
Commercial Real Estate Loan Rates and Fees
Interest rates for a commercial real estate loan are typically underwritten in the form of a spread over a mortgage index such as the Libor Swap or U.S. Treasury. Different lenders will have their own preference for how much of a spread over the index is required. This will result in getting different interest rates from different lenders.
One lender might like a spread of 215 over the 10 year Libor Swap while another lender might prefer 265 over the same 10 year Libor Swap. In this instance, it helps to know where the best rates can be found. This is where Highrise Investment Group specializes with its private network of capital sources. Our goal is to help you achieve the best ROI while maximizing your overall cash flow.
As with interest rates, different lenders have different fee requirements. Fees commonly seen for a commercial real estate loan are an appraisal fee, loan origination fee, legal fee, survey fee, loan application fee and a commitment fee. Some fees are expected to be paid up front while others are paid at closing.
Searching for a commercial real estate loan that meets your expectations can be a daunting and time consuming task. Highrise Investment Group can help you maneuver through the complexity of acquiring capital for your investment. Call 800-605-3238 today or complete our online loan application to get started.
Commercial Loan Terms
|Eligible Locations:||Real estate projects located throughout the U.S., Canada, Puerto Rico, US-VI, UK and Caribbean|
|Property Types:||Office, retail, industrial, mobile home park, hospitality, golf course, marina, special use, mixed use, multifamily, senior housing, student housing, condominium and STNL|
|Security:||First mortgage lien on the subject property|
|Loan Sizes:||$1 million to $100 million plus (larger loans sizes considered on a limited basis for highly attractive
|LTV:||Up to 80% of appraised value|
|Recourse:||Recourse and Non-recourse (subject to underwriting) to key principals except for customary bad boy carve-outs|
|Closing Time:||1 to 6 weeks from application and deposit remittance|
|Interest Rate:||Market oriented pricing as a spread over SWAP rates or Prime rates|
|Loan Term:||5, 7, 10, 15 years|
|Loan Fee:||1-2% of loan amount|
|Prepayment:||Defeasance with 2-year lockout, yield maintenance and other prepayment structures available on a case by case basis.|
|Reserves/Escrows:||Real estate taxes, insurance, replacement reserves, and mortgage interest (as may be required)|
|Underwriting:||Emphasis on equity capital funded in connection with loan, asset quality, value creation business plan,
market analysis, and sponsorship
|Expense Deposit:||$5,000 processing fee (may vary depending on transaction); Expense deposit sufficient to cover third-party, legal
and out-of-pocket expenses
|Third Party Reports:||MAI Appraisal, and Phase I environmental, and other reports as may be relevant and / or required (feasibility, property condition etc.)|