Market Rents vs. What the Market Will Bear

Some of our clients have found that they have been able to secure leases from their commercial tenants at lease rates above prevailing market rents in their area.  While this additional cash flow benefits the owner over the course of the lease term, it can be a detriment when trying to obtain a commercial loan.   Most lenders will adjust the inflated lease rates back to market rents, thus discounting the property value and, consequently, reducing the amount they will lend against on the subject property.

To borrowers this may not seem like fair treatment for their ability to obtain higher cash flow per square foot than comparable properties.  However, from the perspective of the lender, if the borrower defaults on the loan and the lender has to foreclose on the property, at what lease rate will the lender be able to charge to replace the tenants that have either left the property or whose leases have expired and a renewal of the lease must be renegotiated.

So, do not be surprised if your lender adjusts your above market rents when you apply for a commercial loan.  If the loan amount ends up being lower than you anticipated you may want to cross-collateralize other properties with the subject property and/or seek a second loan behind the first to achieve the total funding you require for your project.   

Commercial Real Estate Loan Tip #2

In my list of commercial real estate loan tips, here’s commercial real estate loan tip #2 … Allow adequate time for the application, approval, and underwriting of a commercial loan. While we have managed to secure and close a commercial loan in a week, we don’t recommend it. How long? We prefer 2 months, but the larger and more complex loans may take longer.

There are a number of hard money lenders that can close a loan quickly, but if you qualify for a conventional loan please give your broker adequate time to help you. If you try to close your commercial loan too fast, the terms may look a little onerous. So next time you realize your commercial loan has an impending balloon amount, give us a call right away and allow us enough time to find the best commercial loan for your situation.

Financing Special Purpose Property

We often get requests for commercial financing on special purpose property. Special pupose property would be an unusual use of commercial real estate. For example, an ice skating rink, a bowling alley, or a campground would all be examples of special purpose property.

It is important to recognize that special purpose property can be difficult to finance. We have several lenders for special purpose property, but the application, underwriting, and approval processes can be time consuming and difficult. For example, it is next to impossible to find commercially comparable properties so lenders generally look to the profitability and cash flow of the special purpose when considering the collateral value. The profitability and cash flow are often validated by tax and bank records so be prepared to provide documentation.

We enjoy securing financing for special purpose property and look forward to advising you on your commercial financing needs. Give us a call if you need any help.