April 1, 2016

All CRE Loans Are Not Created Equal: Part 2

In Part One of this series, we outlined the primary differences between commercial real estate loans offered by traditional lenders and alternative lenders. In this next installment, we’ll be giving you tips to follow as you prepare to finance commercial real estate.

Tip 1: Start early. 

If you are acquiring a new investment property, it’s important to research finance options early in the process. Doing your “homework” will pay off, especially once you have a signed purchase and sale agreement. Typically, this document will have financing contingencies, so it is a distinct advantage to have your financing source identified to avoid breaching your contract.

If you are refinancing, it is important to understand whether there will be any penalty owed to the existing lender in the event you prepay the loan before maturity. Prepayment penalties written into your existing loan agreement can be difficult to quantify  Many loans are open to early prepayment without penalty during the six-month period before maturity, but always make sure to check your loan documents.

Tip 2: Get Organized.

Most lenders will require an executed purchase and sale agreement for an acquisition loan. An offering memorandum or investment summary of the property (typically prepared by the listing agent) is an excellent way to familiarize lenders with the deal.

If you are refinancing a commercial property, lenders will expect to see:

1)    Last three years property operating statements

2)    Current rent-roll/tenant roster

3)    Information about your current loan including the lender, current interest rate, and loan maturity date.

Tip 3: Understand Your Personal Risk Tolerance.

As a general rule, most traditional lenders (banks in particular) are going to require a personal guarantee, especially for construction or shorter-term “bridge” loans. Other lenders like commercial mortgage-backed securities (CMBS) conduits and some private lenders will not require personal recourse.

Frequent borrowers or their advisors will understand the current market and know when recourse may or may not be required to secure the best loan terms for a transaction.

Tip 4: Clearly Define Your Needs.

Some lenders are better positioned to meet the needs of particular types of transactions. To optimize the process of getting a loan, you should understand what factors are most important to you:

Quick closing? Many situations demand quick closing above all else. If you need money in a hurry, your best bet is to use a private lender. Just remember that you will pay for the expedited closing in the form of upfront fees (points), a higher monthly interest rate, and exit fees. 

Rate? In most cases, a traditional lender like a bank, credit union, or insurance company will be able to provide the lowest interest rate. However, these lenders are also the most demanding and selective.

Highest Proceeds? Most traditional lenders are constrained by strict credit policies that cap loan amounts to a set percentage of appraised property value. CMBS lenders will typically stretch further than bank or insurance company lenders. Private lenders will get you even further.  You’ll also want to understand which lenders will accept subordinate financing behind their senior position.

Term? Traditional lenders often provide longer terms. 5-10 years is considered a “permanent” loan for commercial real estate, but some lenders can go out to 20-30 years for apartment buildings or retail buildings leased to single tenants with long-term leases.

Where to Turn:

In some cases, your transaction will be a fit for your local bank or credit union and with some luck, that lender will be actively funding Commercial Real Estate loans when you need one.

Avoid falling into the trap of expecting your local bank or your existing lender to always be there. Lenders are always managing their loan portfolios, causing them to move into and out of the lending markets.  They signal their appetite for loan growth by raising or lowering the interest rates offered on new loan commitments.

Above all, don’t lose sight of the fact that there are plenty of traditional and alternative lenders who want to compete for your loan. Despite what lenders may lead you to believe, capital is a commodity if you are an educated consumer who knows where to look for it and what questions to ask.

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