Developers Use Credit Tenant Lease Financing to Fund Construction of Single Tenant Buildings

Even as the general economy shows some tepid signs of improvement, we remain in an extremely challenging credit market. Traditional lenders such as banks, Wall Street investment houses and insurance company conduits, are still being very coy about funding loans. They're worried about their capitalization levels and the possible effects of coming regulatory reform. In-short, they are hesitant to close deals until some semblance of clarity returns to the debt markets.

Construction financing has been particularly hard to come by during this credit squeeze. All commercial real estate was over built during the first 6 years of the decade and financial institutions are in no hurry to add to existing inventory by funding construction deals. Lenders have shunned development loans for the last 24-36 months. Many, many good projects sit dormant due to the lack of liquidity in the construction capital markets.

Among all the doom and gloom however, one segment of the commercial construction industry has been bucking the trend. It turns out there is plenty of capital available to build office buildings, retail outlets and even light industrial facilities as long as the building in question is triple net (NNN) leased to a single "investment grade" tenant. (BBB- or better by S&P)

Financing NNN leased development is possible because of a special type of lending known as credit tenant lease (CTL) financing. CTL is a unique funding platform designed specifically to fund the purchase, refinance and construction of commercial property that is (or will be) occupied by a single tenant with good credit. CTL loans are underwritten based on the structure and length of the lease and the financial strength of the tenant rather than the underlying value of the building or the credit of the borrower. Unlike traditional lenders CTL lenders count the lease and the income it assures as the main collateral that secures the loan.

CTL mortgages are originated by commercial real estate investment banking firms who underwrite and sell private placement mortgage bonds in-order to fund the loans. The bonds are purchased by pension funds, endowments, insurance companies and other institutional fixed income investors.

CTL loans tend to be long-term, fixed rate fully amortized, commercial mortgages. Most CTL lenders place no restrictions on loan-to-value and will write loans to 100% LTV subject to a very low debt-service-coverage ratio (DSCR) of about 1.01-1.05. Likewise, there are no restrictions on loan-to-cost (100% LTC) for construction deals. The result is the highest possible loan amounts for property owners and developers.

CTL lending for construction and development is true construction-to-permanent financing; there is only one funding and only one closing. Mortgage payments are "interest only" while the building is going up and begin to amortize only after the tenant moves in.

The most popular investment grade tenant (and the easiest to finance with CTL) are US government agencies such as the US Postal Service, the Social Security Administration and the Department of Homeland Security. Government agencies all have very good credit ratings because it is assumed that the Federal Government will stand behind their debt. Developers building federal court houses for the Department of Justice or administrative buildings for other government agencies will enjoy easy access to the funds they need.

There are also ample funds immediately available for private sector buildings as-long-as the tenant is financially sound. The retail giant Wal-Mart qualifies for CTL lending along with The Home Depot and Kohl's stores. The drug store chains Walgreens and CVS are both expanding rapidly and are both eligible for CTL financing. McDonald's is the largest investment grade tenant in the food service industry.

All commercial mortgage lending has been curtailed during this economic downturn and the recovery, while it may be underway, is many months in the future. During this time of turmoil in the credit markets, it is encouraging to know that some lenders are still making deals and funding loans. CTL financing continues to be a dependable method of financing investments in single tenant, NNN leased buildings, including construction and development.

Collateral Loans

Collateral Loans, what are they? A collateral loan is simply borrowing money, while pledging something that you already own as collateral.

What this means is you borrow money but you have to give something in return for that money until the money is paid back.

Do you literally give the collateral away?

No. Let's say you have been an independent dump truck driver for the past 5 years and you are ready to purchase another dump truck to expand your business. You own your truck because you only took out a loan for 4 years.

Your dump truck is valued at $50,000 and you are willing to use the truck as the collateral. The finance company will place a lien on your dump truck, lend you the money for the new dump truck that you are buying and will release that lien only after you have paid the loan back.

This type of Small Business Financing is actually quite easy to be approved for if your collateral qualifies and holds enough value for the dollar amount that you need.

What can be used to qualify for this type of loan?

Typically the finance companies are going to look for good, hard collateral such as construction equipment, heavy duty vehicles, etc.

If you happen to default on the loan, it will be much easier for the finance company to sell your old and new dump trucks (yes they get both if you don't pay them back) to someone else than it will be to sell a commercial freezer (not good collateral for a collateral loan because it doesn't hold a high re-sale value).

If collateral loans can be easier to get approved for than traditional Small Business Financing, why isn't everyone doing it? That's an easy answer. They typically come with much higher rates!

Collateral loans are typically used by people who have less than desirable Fico Scores, which is why the finance companies ask for the security of using the additional collateral. If you do not pay back the loan, the finance company will take the equipment that you purchased, as well as the collateral that you pledged to get the loan.

How much will the finance company give you based on the above scenario of a $50,000 dump truck and how long do you have to re-pay the loan?

Well, it really depends on the finance company and the over-all current value of the truck. You can get anywhere from up to 50% of the current value, all the way up to 100% of it's current value.

Finance companies will generally go out to 5 years but keep in mind, the longer term you take, the more you will probably pay.

The reason you may pay more is because it's taking longer for the finance company to get their money back, while the value of the collateral is going down. We recommend taking the shortest term that you feel comfortable with.

A couple of questions you may want to ask yourself are will you make enough money to pay your monthly payment and put money in your pocket at the end of the day?

And, do you feel it is necessary to make this purchase now even though the rates and terms may be less than desirable?

Only you know if now is the time for whatever the loan will be used for so if you feel confident and are willing to put up your collateral in order to do what you need to do, what are you waiting for?

Sometimes business opportunities come when you are not expecting them and if you have no other way of jumping on whatever this train may be, you may just have to pay the higher price with a Collateral Loan.

Types of Commercial Loans That Are Available

Commercial loans are obtained for many different business ventures. For this reason there are different types of commercial finance. They in general, is for the purchase of property. It is like a loan to buy a home. The property becomes the collateral to secure the loan. Upon the pay off of the loan the business owner will then own the property. Additionally, like a home loan, a business owner can use the equity in their property to get future loans.

The first type of commercial finance is called an owner-user loan. This type of finance would be for property that will be used to conduct business. Some examples include a doctor buying a building to house his practice or a bookstore owner buying a building from which to conduct their business. Most of these are start up for a business just starting. One issue with these loans is that since the business is just starting there is no record of the business dealings. The bank will use the business owner's personal credit to qualify them for the loan.

The second type of commercial finance is an investment property loan. This type is used for businesses where the actual property will be used to make the revenue for the business. Some examples are a building which will house a shopping mall or an apartment building. Many of these loans are start up loans, like with the owner-user loans, so again the lender will base their decision upon the business owners personal credit. However, many of these loans are for business owners that own a chain of buildings all operating the same basic business. In this case the business would be established and the loan could be done under the business name.

The last type is a hard money loan. These loans are for development projects. Some examples are older buildings bought for rehab or a group of houses bought to convert into apartments. These types of loans are often given to development or building companies. These companies fix up the properties and then resell them. These loans usually are set up to avoid early payoff fees and other fees associated with paying off a loan early. The banks enforce these fees so they do not lose out on making the interest money they would should the loan be paid for the full term.

Whatever type of commercial loan a business owner is taking out, they should go to the lender prepared. They should understand the basics of the type of loan they are wanting so they can properly be prepared to negotiate terms. They will also be able to look over the terms and make an informed decision about it.

Commercial Vehicle Financing

Commercial vehicles precisely are all vehicles used for different sorts of commercial purposes. Any vehicle which exceeds a certain prescribed weight is considered to be a commercial vehicle. Therefore trucks, vans and buses used for business purposes are termed as commercial vehicles. The use of commercial vehicles is inevitable in all sorts of business. But owing to their high prices, many business organizations seek aid of commercial vehicle financing.

Commercial vehicle financing helps individuals and corporate customers to acquire any type of commercial vehicles. There are various options available for financing commercial vehicles. Catering truck financing is one among them which helps to acquire food trucks, lunch wagons etc. The catering business people require these vehicles to supply food to several locations. These trucks are highly useful in construction sites, road sides, fairs and other places. They are helpful in providing hot meals or cold beverages. Due to their special feature of keeping food hot or cold, they can be pricey. Hence commercial vehicle financing is essential for purchasing such type of vehicles.

Commercial recreational vehicles are important in any mobile business. These vehicles cater to the unique requirements of the business and so they are costly. Sometimes commercial recreational vehicles can be modified into mobile classrooms, offices, salons etc. Many of the traditional lenders many not understand the need for commercial recreational vehicles. Therefore they may not be ready to offer financing to acquire them. However there are some genuine companies that have experience in financing commercial vehicles. They can offer financial assistance to get the vehicle for any type of mobile business. Since these vehicles can help generate revenues, investing in them is not an expense but a great way to increase profitability.

Mobile on-site office truck provides a wonderful way to work at remote sites. The fast developing business world depends not only on phone calls for communication but also on emails, fax and other effective communication methods. It is also necessary to send or receive files, reports etc regularly. Hence it is essential to maintain the essential advanced facilities in mobile on-site office trucks. These vehicles come in different configurations to suit different office needs. Due to their specialized functionality, they carry high price tags. Therefore commercial vehicle financing is often required to acquire them.

While seeking the help of financing companies to acquire commercial vehicles, you need to select the company that has vast experience and knowledge in the field. This helps you get financing at low interest rates. There are some valid financing companies that have experience in financing commercial vehicles. You can approach them for getting the essential help.

The genuine financing companies accept online application form submitted by you immediately. You can get approval quickly and sometimes you can acquire the commercial vehicle you want on the same day itself. There would be no cumbersome application procedures and so many business owners find it comfortable to get financing commercial vehicle. They can repay the amount in easy monthly installments.

Using a Factoring Company

One of the side effects of the economic crisis is that more companies need business financing while less institutions were willing to provide it. Because of this, companies started looking for other options to business loans. One of the options that has gained substantial traction in the last year is invoice factoring.

Invoice factoring is a form of financing that is often offered by factoring companies. It's ideally suited for companies that are selling goods/services on net 30 to net 60 days, but can't afford to wait for payment. This is a common problem since most medium sized companies have immediate expenses and don't have the necessary capital to wait for payment.

Factoring companies solve this problem by accelerating payment of your invoices. They act as an intermediary who buys your invoices and pays you for them immediately. This provides your company with the necessary cash flow to pay operating expenses and handle new orders. The factoring company, which now holds the invoice, waits for your client to pay for the invoice and settle the transaction.

A factoring company usually buys your invoice in two payments. The first payment, called the advance, is usually 80% of the invoice. The remaining 20% is called the reserve and is held to cover any invoice discrepancies and potential underpayments. Once your client pays the invoice in full, the factoring company sends the second payment, which is the 20% reserve less the factoring fee.

Factoring fees are determined by the credit quality of your clients, the volume of financing that you need, your industry and invoice diversification. They vary in range but they are usually a specific percentage of the purchased invoices.

One of the big advantages of invoice factoring is that factoring companies consider the credit quality of your invoices to be your biggest asset. This means that medium sized companies that have a solid roster of clients can usually qualify. However, to qualify for factoring your invoices need to be free of any potential encumbrances or liens.

Commercial Loan Processing Explained

It is important to understand the process behind commercial loan processing to gain an insight into how a financing institution assesses and decides on whether or not a loan is granted. While commercial loans provide an attractive source of income in terms of interest, lenders exercise a lot of care in evaluating borrowers to ensure that funds lent out are recovered along with the earnings.

Applying for a Loan

Lenders basically pre-qualify potential borrowers by assessing their background and capacity to pay. The process starts by initial gathering of background and personal information such as purpose for the loan, your income and existing debts. To formalize and commence the loan process, you must then fill-up and complete a loan application form.

Requirements to Expect

Take note of the documentary requirements that will go with your loan application. This may require some consideration and time to gather. A business loan for example, may require a business profile that gives a general background of your business. In addition, a business plan that clearly describes how your business will be run and how it is projected to perform financially will be required.

Standard requirements for different loan types will include personal financial statements listing all personal assets, liabilities, as well as your personal tax return for the past three years. Another fundamental requirement is collateral. Collateral for a loan may include assets such as real estate and stocks or bonds, hard goods such as equipment, and other personal assets and guarantees. This is meant to give the lender some guarantee that you will be committed to seeing your loan repaid. It also offers assurance that should you fail to meet your loan obligations, they can recover from your assets the money that they have lent out.

Processing Your Application

A loan officer will review your application and documentary attachments. Your loan officer will review your credit reports, collateral documentation, as well as your income information. Some additional documentation may be requested in order to support the information in your loan application so that all details may be properly assessed and verified.

Loan Underwriting

Once all documentary attachments are deemed satisfactory, your loan application will then be submitted to a loan underwriter or a loan committee. They will review, assess, and eventually decide whether your loan will be approved.

At this time a processor will present you with a letter of intent or term sheet for signing. This document includes the amount of financing, terms of payment, type of security or collateral, and other key terms. The decision to approve or reject is usually made within five days. Expect some requests for you to provide additional documentation during this underwriting process.

You will be required to sign the letter of intent and along with it, you may be asked to give a check to serve as a deposit, and to pay for some third-party reports used in the underwriting process such as appraisals.

Finally Getting Your Loan

Once all the conditions and requirements are satisfied, the loan application package is resubmitted to the loan committee for final approval. Upon loan approval, you will be required to sign the final loan documents. If you have a closing agent (an attorney or escrow company representative for example), they will receive the closing documents and coordinate the signing of all necessary papers. They will also coordinate the transfer of funds, record the deed transfer and mortgage, and order title insurance.

With all requirements met and all closing documents in order, your loan can finally be released! This can be done in several ways - electronic wire transfer to your designated account, or issuance of a cashier's check or draft in your name.

Apply For Commercial Loans using our FREE Commercial Loan Application to compare rates and contact multiple commercial lenders. We have over 300 commercial real estate lenders, business and construction lenders as well as private equity groups waiting to help you. Best of all, GlobalBX is FREE!

Who Are The Hard Money Lenders In The New York Area?

Finding hard money lenders is slightly easier in the New York area than in other areas. One of the primary reasons for this is that these lenders typically try to operate in familiar territories and in an area like New York where there is plenty of real estate for consideration. So here lenders will also have many more customers rather than the relatively sparsely populated areas. This naturally creates a greater 'pull' for private individuals to come and do business here.

Hard Money lenders are the private individuals and companies who will lend to you to buy a house - for instance, when the other more traditional financial organizations will not. This can be due to a host of reasons which can range from bad credit ratings to the desire to purchase the home in a remote area with which the traditional organizations are not comfortable.

A few tips to find Hard Money lenders in the New York area:

1.The phrase Hard Money lending sounds a bit intimidating and you will find that the same thing is known by other names. So instead of looking for Hard Money lenders look for Creative Financing in the New York area or look for Participative Financing while browsing through the web.

2.Go through the classifieds of the local newspapers and there again instead of scanning for Hard Money lenders look at the description more closely. Watch out for words which talk about loan problems, private money, dream home etc.

3.Call up your mortgage broker and ask if they have contacts to private investors or if they are aware of individuals who may know hard lenders.

4.Make full use of brokers in this case. On the web while you may not find a whole lot of Hard Money lenders in the New York area directly, if you do a search you will find that the search results will give you some links to blogs of individual hard lenders. Many of these individuals are not in the business directly but will know people or companies who can often help you.

5.When you are looking for Hard money lenders you may (from time to time)end up getting in touch with a loan predator, these are individuals or companies who make the deal in such a manner that there is a high chance of you defaulting on your payments. You must be wary and ensure you are comfortable with their reputation by seeking the contact numbers of other individuals they have provided loans for in the vicinity of New York and where possible, go and meet them. Another way is by ensuring that the equity you have in your house remains around 50% and in most cases you should be safe.

Can I get a loan to buy commercial property in New York?

While hard money lenders usually lend for the purchase of a home or a residential property, many firms are now coming up with ways and means with which they can creatively design a loan so that people can buy commercial land or property as well.

What are the terms of these loans?

Typically the interest rate is higher, around 12% - 18% and the loan is a first mortgage in almost all cases with the balloon payment due after one or two years. These loans are characterized by their high fee and relatively lower loan to value ratio. Apart from the interest rate, there is a fee which can go up to 8% of the loan amount. The hard loan money lenders want to keep their loans safe at all times and for that reason they need to ensure that you have sufficient equity in your house in case of default they can sell and recover their loan.

All in all, even at the risk of stating the obvious, hard money lenders should be your last resort but they are not loan sharks and can be used to get away from a tricky situation if you assess your requirements and your financial position correctly.

Stated Income Commercial Loans, Pros and Cons

Stated income commercial loans have been a decent option for borrowers that do not show enough income on their tax returns to qualify for bank financing. These loan programs allow the borrower to "state" both their personal and business income, though the level of documentation varies from one lender to the next. In addition stated income commercial loans can be especially attractive to businesses with a cash component (like restaurants, automotive repair, etc) that enables them to get long term fixed rate financing with higher leverage and longer amortization periods than normal.

As mentioned, the level of "stated" varies from one lender to the next. For example, on investment properties some lenders would still ask for all leases, rent rolls, year to date financials, personal financial statements, etc. but would not ask for personal tax returns and or real estate entity tax returns. On owner occupant transactions, business tax returns may not be required though personal tax return would be as well as, proof of insurance, copy of existing mortgage statement, would still be required. There are a few lenders out there that design the loans to be more as the name implies, and require virtually no documentation, though the borrower pays for this in the rate and prepayment penalties. In general the less documentation asked for, the more expensive the transaction for the borrower.

Positive aspects

Amortization schedules of 30 years are not uncommon. Compared to the typical bank loan at a 20 year schedule this saves the borrower cash flow by spreading out the loan. Fixed periods comparable to residential loans, like 30 years, 15, 10 and 5 are often available. In contrast most bank loans do not go beyond 5 year fixed sometimes 7 years but that is rare.

There is a harsh provision in most bank loan documents. It's referred to as the "call provision". It gives the bank the right to call due the borrower's loan whenever and for whatever reason the bank feels justified - even if the borrower is not in default on their loan. Although hard to believe this clause is in virtually every bank mortgage. In short it helps the bank protect their investment and allows them to "pull out" if they lose confidence in the borrower's ability to keep the business going/paying their loan. This clause not included in stated income loans.

No reporting to the stated income lenders after the loan closes. This ties into the above, as most banks will require monthly or quarterly statements. If from the financials they see a negative trend they hold the right to call the note or change the terms of the deal.
Negative Aspects

The two obvious negative features of these loan programs include higher rates and expensive prepayment penalties. Rates are normally app. 2% above comparable banks rates though exceptions can go in both directions. A few lenders are closer to roughly 1% over and with the longer amortization schedule the borrower can enjoy a lower monthly payment when compared to bank financing. On the other side, the rate can be double digit for borrowers with poor credit and special use properties.

Prepayment penalties can be brutal with this loan. Typical bank pre-pays are often 3% for 3 years or an annual step down like 5%, 3% 1% as in the case of the SBA 7a loan. It's not uncommon for the stated loan to be as high as 10% for 10 years. On top of that some lenders demand lock out periods of 3 to 5 years.

Borrowers should take their time evaluating their options, and pay attention that their planned holding period matches the fixed rate and prepayment penalty period. Also, this sector of the industry has been taking it on the "chin" with the credit crisis and the makeup of this loan program continues to evolve. Borrowers may want to look at the SBA 7a program as future income projection are allowed as well as DCR are low as 1.1 are permitted as well. Take your time and evaluate all your options as you do not want to make your situation worse by going with a stated income commercial loan that's not a good fit for your situation.

Business Property - A Look At The Advantages And Disadvantages Of Buying

Nearly every type of business needs a premise from which to operate - In the case of a small business it may be possible to work from home however as most things do eventually grow and expand, it may be necessary to obtain larger working facilities.

The majority of businesses will require their own premises and are generally faced with the option of either renting or buying. The obvious choice for many would be to buy, finance allowing however there are advantages and disadvantages to both sides.

Advantages Of Buying

Retention of ownership - most businesses will need to take out a loan in order to purchase property. In the case of taking out a mortgage, the business is able to raise the capital without resorting to selling a share in the company, either to an interested party or by way of issuing shares. In this case the original owners will have retention of both ownership and control. The mortgage lender will have the right to charge interest on the loan amount outstanding however it will have no interest to a share in the business or its profits. The lender has an interest solely in the property and is only permitted to call in the loan in the event of borrower default.

Taxation - Businesses are permitted to make mortgage interest payments with pre-tax money that is deductible for tax purposes as expenses.

Cost and cash flow management - A commercial mortgage allows a business access to finance that would not usually be available. They can offer a degree of flexibility in designing a repayment scheme to suit the needs of the business, which may include fixing the repayments for a set period of time. Mortgage repayments tend to work out lower than rental payments and the borrower in this case will know what the payments will be in advance - this fixed payment can often aid the business with cash flow and managing costs. Businesses that rent a premise can be exposed to market conditions which could result in payment fluctuations on review.

Security of tenure - Businesses and individuals that rent have very few guarantees beyond the end of the current agreement.

Asset appreciation - This of course is by no means guaranteed however property has long been viewed by many as a very sound investment. The business or individual will have an asset which can potentially grow in value, just like residential property - this could subsequently increase the value of the business.

Financial flexibility - Taking out a loan by way of a mortgage to buy a business premises can free up money held in the business for other purposes. Borrowing money outside of a mortgage could prove to be more costly. It may also be possible to remortgage in order to raise finance in the future by using the available equity.

Retirement - Many people decide to hold property in a pension plan which can offer a tax-efficient way of buying the premises and boosting pension benefits.

Disadvantages Of Buying

Financial difficulty - Like any other mortgage, the mortgage lender will hold a legal charge over the property. Nearly all businesses meet financial difficulties at some stage which could potentially result in mortgage payments being missed. In the event of default the lender may take steps to repossess the property - if this happens then it would leave the business with nowhere to operate from.

Relocation - In the event a business needs to relocate, it is relatively easy to terminate a rental agreement. In the case of an owner occupier, the process is of course far more complex.

Flexibility - A business that rents has a far greater amount of flexibility that a business that is tied to a mortgage. Buying would only make sense if the business is confident over its future which encompasses two main factors - relocation & business expansion.

Drain on Capital - When it comes to getting a deposit, this can mean a huge drain on the business capital as this is usually taken from the profits or reserves.

Maintenance and upkeep - The owner of a property has management responsibilities that a tenant would not usually have - maintenance and upkeep of a property is a constant process and can prove to be very expensive.

Commercial Loan Interest Rate - Negotiation Strategies

Cutting even a half a point off of a commercial loan's interest rate can save a business thousands - even millions - of dollars over the life of a loan.

It is possible to look to obtain a lower one for your business loan, whether the loan is existing or new.

Strategy #1

A good interest rate negotiation strategy is to obtain multiple quotes for your specific business loan request from at least two other lending institutions. This can create a "bidding war" provided your financials and company background are both sound.

Even if you've been with your current bank for years, notifying them that you are shopping for a lower rate can create a scenario where they step up to the plate to match or beat a competing offer. Since it is important to approach the bank in a way that will not offend them, if they are made aware that you are simply shopping rates in the best interest of your business they should fully understand.

Strategy #2

A business banking department relies very heavily upon having a healthy amount of deposit accounts. You can use this information to your advantage. Consider negotiating with the bank for a rate decrease in exchange for your agreement to maintain on an ongoing basis a certain dollar amount of deposit accounts with the bank.

There are many other negotiating tactics, and these are two that have proven to work in the past because they are in the bank's best interest. First, by warning that you are shopping for rates as opposed to going with another bank unannounced, you have put the bank in a position to be able to have the loan for themselves before it is lost to a competitor. The second strategy gives the bank great value by virtue of your agreement to maintain a certain level of deposit accounts with the bank.

Strategy #3

Another proven strategy that is in both the bank's interest and yours is to ask the bank if they are willing to present you with options. For example, you could see if they will give you the choice of a fixed interest rate or a variable interest rate. If you are able to convince three banks to give you rate options, you will be in a position to choose from at least 6 different scenarios for your business loan, rather than just the one that most borrowers are faced with.

These strategies can help a business to obtain a lower interest rate on a commercial loan.

You are welcome to share this report in its entirety and unedited. All links must remain intact. No information in this report should be interpreted as advice, as the report is meant for informational purposes only.

For a First Time Buyer - Commercial Mortgage Tips!

A mortgage loan may have certain hidden charges, beware of these. If you are a first time buyer it is advisable to go through a guidance manual which will help you understand the intricacies of a mortgage. It takes some time of yours to go through the manual and it is a must as you are pledging your valuable collateral against it.

You are considering a long duration loan, see if you want to stretch your loan period for long? Say about 15 to 25 years would be ideal for those who can't afford huge equated monthly instalment every month and would want to pay less but over a stretched period of time. If you have sold your shares and property and have a lot of cash all of a sudden, you can decide to pay your mortgage earlier than that period. But, cross check with your bank what is the penalty you need to pay in case you pay back early. Just cross check with the rate of interest you would save by paying off early. If it is really lucrative, then you must try taking this wise decision.

It is advised that you read the fine print carefully so that there is no confusion. You must be aware of the options open to you. If it is for pub finance, you must be aware that there are pub brokers, bankers and brewery owners to help you out. Getting your liquor supply and your loan from the brewery owner would be a good idea for your bars, pubs or night clubs. They may offer you discounts on liquor supply as well as your loan interest rate.

The Logistics of Obtaining Commercial Loans For Apartment Buildings

Getting a commercial loan for an apartment building is considered one of the easier loans to get with respect to other investment properties. This is due to the fact that commercial lenders focus primarily on the subject property as the repayment source with the borrower being a secondary repayment source. As apartment buildings have historically been a very stable asset class, they typically can get some of the best lending terms.

Many property investors focus on single family homes, rather than apartment complexes, because it is often easier to manage. Financing can be difficult to obtain from the commercial lenders for single family homes, and it can be difficult to get the business off the ground. However, many investors recommend that when borrowing from commercial lenders, you take the focus off yourself, as it is with single family homes, and put it on the property, like an apartment building.

Often, even with little capital, a loan will be approved, because of the high return on apartment buildings, and the low risk from defaulting on a commercial loan. Before you go out and try and purchase an apartment building, you should know what qualifies as an apartment building under commercial loan guidelines. One to four family dwellings are usually not considered commercial loans; this would include duplexes and fourplexes. However, if there are five or more units in the building, this would be considered a commercial loan.

Apartment buildings can have tremendous profitability if managed correctly. For example, if you have a gross income of $100,000 from rental income on a building, and you deduct $60,000 for operating expenses and vacancies, you still come away with a $40,000 profit off of it. Dividing by a 7 percent cap rate, will give you an estimated value of the property, which would come close to $570,000. Often commercial lenders will look at statistics, like this, to determine the cash earning potential on apartment complexes. Naturally, it is not hard to see why these types of loans are approved so quickly and easily.

Now, just because it can seem relatively easy to get a commercial loan for an apartment building, this does not mean you should not do your research. Going to a commercial lender with a detailed plan of action for the apartment building, along with your own cash projections, will make the process move much quicker. Doing your research can also benefit you. For example, if you are going to fix up the apartment property, you will therefore increase the value greatly. A property with a high vacancy can have the greatest upside potential; however it will probably require that you put more money down that you would have to with a stabilized property. This is because most lenders underwrite to a debt service coverage first and a high vacancy can limit your supportable loan amount. As with any loan, researching and being prepared when meeting with the lender, will only benefit you and help your business become more successful.

Daycare Center Loans - Current Conditions

With major national daycare center lenders like UPS and CIT now out until further notice, many childcare centers owners and prospective owners are searching for financing options - and are finding few reliable programs.

One of the biggest issues here for both independent and franchised daycare centers is that most banks will no longer consider Tenant Improvement Loans. I.e. loans to build out leased space. Instead, most banks (that are still funding loans) want the collateral of the commercial real estate.

This can create a couple of different issues for the owner or franchiser. Number one, it can run right against the business model of the franchise. For example, the franchise might have a smaller location requirement and the process of finding land, going through the zoning/permitting, constructing the facility, etc don't make sense, based on their smaller location model.

The other issue for the individual owner is that the capital injection will normally be greater, not on a percentage basis, but rather on a dollar amount. For example, on a leased facility, the operator would be expected to come in with 10% -15% cash of the tenant improvements/equipment costs. So, if these costs were $700,000, most franchisee have been expected to come in with $70,000 -$105,000 "out of pocket".

If on that same deal, the operator decided (by choice or forced into due to the credit crisis) to own the facility, they would need roughly $250,000 to $375,000 i.e. 10% -15% of the total project cost (In this example, say $2,500,000). This difference in dollar amount is obviously substantial and will eliminate the opportunity for many hopeful daycare center owners.

For operators that can come up with the required cash, owning the facility is often their best route, regardless of the credit crisis. For one, their monthly payment is typically lower than if they leased.

This increase in cash flow is paramount for any business whether daycare or not. Also, additional benefits such as depreciation and real estate appreciation are two classic advantages of owning. And of course, every month the borrower chips away at the loan balance building long term wealth rather than simply paying rent.

All in all, there are still options out there for daycare centers financing. However many industry players will have to be open minded and flexible with adapting to the current standards if they want to get there daycare centers funded.

Commercial Loan Refinance - Current Market Conditions

Trying to get a commercial loan refinance closed right now is difficult as the capital markets continue to take it on the "chin." The small balance arena, meaning mortgages between $400,000 - $5,000,000 are definitely not immune as guidelines tighten with in this sector. Beyond the obvious lower loan to values, increased debt coverage ratios, etc there is a real sense of confusion as to what the rules are among all the players involved; from huge banks to small brokers.

Normally guidelines are known and clearly set. Brokers or other professionals are able to qualify a loan and figure out which lenders would be interested. However, it now seems banks are generally struggling with what they want to lend on. Property types, loan amount, pricing, etc, are changing on a daily basis. Two months ago this was not the case.

The biggest 'victim" of this seems to be special purpose properties, as they have quickly been pushed out by many lenders. Hotels, automotive related, restaurants, self storage etc have lost probably 40% of their former loan options. Many banks have just stopped quoting on these properties.

Another issue that has put the brakes on many commercial loan refinances has been the "small town restriction". Many of the largest lender in nation will no longer look at deals if the population of the town the property is in is not over 50,000.

Rates have also been very touchy issues as of late. Normally margins that lenders charge on top of an index is around .3% from one bank to the next. Meaning for example if you where to get 5 quotes they would all be within .3% of each other. Oddly we are now seeing rates across the board. We recently saw a difference of 2.5% among 4 different banks on the same loan.

It seems that the current conditions, and how those will affect an individual's options on their commercial loan refinance will be at the mercy of the market. Hopefully we will soon see an end of the subprime mess and the effects it's had on the cmbs market.

Commercial Real Estate Loan Strategies - The Value of Using Stated Income

The use of "Stated Income" (no tax returns and no income verification) commercial loans is a critical strategy to avoid several commercial mortgage loan problems. For example, many borrowers will simply not qualify for a commercial real estate loan if tax returns are used due to high business expenses (and low net income). This article will describe what differentiates a Stated Income business loan from a conventional or traditional business loan.

Very few traditional banks use Stated Income for a commercial real estate loan. Many/most commercial lenders will perform a thorough income verification as part of their underwriting process. Most non-traditional commercial lenders do not require tax returns or any income verification for a Stated Income commercial loan. Traditional bank commercial loan underwriting conditions will typically include copies of tax returns as well as a requirement to sign IRS Form 4506 which authorizes the lender to obtain tax returns directly from the IRS. Some lenders require this form in addition to current tax returns. The more devious use of this form is when lenders make a point of not requiring tax returns but separately ask the commercial borrower to sign this form. The most common explanation in asking for this form will involve the words "routine request". This will usually occur just before the final closing and be further characterized as "one final small detail". In reality IRS Form 4506 is neither "routine" nor a "small detail". The use of this form is a lending practice that can have a potentially detrimental impact on a commercial borrower's financial interests. In contrast, for most non-traditional commercial lenders, IRS Form 4506 is not required for their Stated Income business loans.

The value of using Stated Income does not end when the commercial loan closes. Many/most traditional banks require income verification/audits even after the commercial real estate loan closes. Most commercial borrowers won't believe this until it happens, but many traditional commercial loans will have covenants stipulating that the lender must receive financial data even after the loan closing and that the loan can be recalled (forcing the commercial borrower to pay the bank back early) if the audit of this data is not satisfactory to the lender. Most non-traditional commercial lenders do not verify income either before or after the Stated Income commercial loan closes.

I have prepared a Special Report entitled "The Top 5 Reasons that Banks Decline Business Loan Applications and the Top 5 Strategies for Converting a Declined Loan into an Approved Loan". One of those five reasons is that loan underwriters find something on a tax return that disqualifies a borrower under the bank's lending guidelines. This "something" will frequently be insufficient net income, but when loan underwriters look at tax returns, there are many other possibilities which produce a similar result. If the commercial borrower is applying for a Stated Income business loan, this situation will not occur because tax returns will not be included in the commercial loan underwriting process.

Many commercial borrowers should be interested in strategies for preventing a lender from obtaining their tax returns directly from the IRS or preventing a lender from forcing a long-term loan to be repaid early. Stated Income commercial real estate loans provide a viable commercial financing strategy to alleviate concerns about these issues. Stated Income business loans are no longer just a strategy to help a commercial borrower that could not obtain a commercial loan any other way. Stated Income commercial loans are now increasingly viewed as a a vital method to protect the commercial real estate borrower's overall financial interests, both before and after the loan has closed.

Copyright 2005-2006 AEX Commercial Financing Group, LLC. All Rights Reserved.

Funding an MBI/MBO With Loans

Funding an acquisition or an MBO/MBI is a large subject but in essence there are four main sources of money to consider. The two main sources are commercial debt by way of borrowing against the assets being purchased and equity, which will come from a mixture of a venture capitalist (VC) who is backing the purchasing team, or the director's own equity raised for example against personal property. There are also grants and soft loans, which are of particular relevance in development areas, and vendor finance by way of deferred payment terms or an earn out of the seller's interest.

It is important to remember that the funding sought needs to cover not only the purchase price including clearance of any debt to be satisfied as part of the deal, but also the working capital required to trade the business after completion, and any investment required to develop or restructure the business after the purchase. After all, it is no good buying the business only to find that you do not have the cash with which to run it. You therefore need to work closely with your advisers and make sure your forecasts are robust and that you raise sufficient funding to see the business through all the contingencies you can envisage, while also ensuring you comply with the legal requirements of borrowing against a business's assets.

Money raised by way of loans against assets will comprise a 'structured finance' package of borrowings against property by way of commercial mortgage, (or bridging loan if a transaction needs to be carried out quickly) or sale and leaseback, plant and machinery by way of sale and leaseback, and debtors and sometimes stock by way of a factoring or invoice discounting facility.

Providers of this type of debt funding include the banks, which will have a range of financing products, and don't forget that you will need a trading bank account anyway but banks are however unlikely to want to fund such deals by way of overdraft facilities.

'Structured' or 'Package' lenders, are invoice discounters who are also able to offer financing against property and/or plant and machinery, as well as in some cases stock. While such funders are key to many successful MBO/MBIs, some limit their overall exposure in any deal to a certain percentage of debtors, such as 150% of the debtor book, which can limit the ability to raise funds from other assets.

There are also stand alone independent specialist funders, which focus on providing finance against any one particular class of asset, such as a factor or invoice discounter to cover debtors, a building society to lend on the property, and an asset financier to cover the plant and machinery. Use of such funders in whole or in part in combination with a package lender can provide greater financing or 'headroom' than use of a package funder alone which can be important in some cases.

Where you own commercial property, generally 70% of the open market value (OMV) can be raised through a mortgage (or by using a bridging loan if funding is required quickly or where the transaction does not fit mainstream lending criteria), while 100% of OMV can be obtained (or more where valuations have been conservative) by way of a sale and leaseback, reducing the requirement to fund part of the property out of equity.

Where a business has significant plant and machinery, 70% to 100% of its value can be raised by a 3to 5 year sale and leaseback arrangement.

An advance of up to 85% of the available debtor book, which is to say those debtors of the right type, under 90 days old, up to credit limits and so on, should be available. Some funders will also take account of finished goods stock by way of an increased level of draw down against debtors, sometimes in excess of 100%.

Your professional advisors or brokers should be able to pull together an appropriate package of funding from these types of sources for your transaction. The key information they will need to establish how much debt funding can be obtained for an acquisition are details of:

* The deal, the type of sale, a share purchase or business and assets, the purchase price, the expected working capital requirements following sale and the funds coming in from other sources by way of equity from a VC or the buying team, grants or vendor financing by way of deferred consideration or an earn out.

* The business, which sector it is in, its trading history and performance including the last three years accounts, its forecasts with underlying assumptions and details of any turnaround plan if it is in difficulty.

* The management team including CVs and statements showing their net worth.

* Valuation and description of any freehold or leasehold property and details of any environmental or contamination issues.

* Valuations, or if not, an asset listing with sufficient information regarding machinery make, model, age and condition to allow a desktop valuation, of all plant and machinery together with outstanding HP and lease liabilities.

Aged debtor lists, aged creditor lists and a package of sample sales order, delivery and invoicing documentation, as well as finished goods listings.

Commercial Hard Money Loan Scenarios

A commercial hard money loan is a non-conventional commercial real estate loan that is not made by a traditional bank. This type of commercial financing has been in use for over 50 years. Such loans usually have a first lien on commercial property. If a hard money loan has a secondary lien, it is known as mezzanine financing.

There are three financing options for most commercial real estate scenarios: traditional banks, intermediate lenders and hard money lenders. The primary rationale for a small business considering a commercial hard money loan is that traditional or intermediate commercial financing options are not viable.

In those situations where traditional banks and intermediate lenders both say "NO", it then makes good business sense to explore under what terms a hard money commercial loan might be available. Many viable small business projects can be funded ONLY via a hard money lender. Before accepting "NO" from the traditional banks and intermediate lenders as the "FINAL ANSWER", a prudent small business borrower should determine if a hard money lender will say "YES".

Commercial hard money loans are typically completed more quickly than a traditional commercial loan. Compared to traditional bank business loans, commercial hard money loans will generally involve a higher interest rate (prevailing range of prime rate plus 4-8% for typical scenarios), higher fees and shorter-term financing (one to three years). However, because many hard money loans offer interest only terms, the payments can be lower than a fully-amortized loan with a lower interest rate.

Three common commercial financing scenarios using hard money loans are described below.

COMMERCIAL HARD MONEY LOAN SCENARIO # 1:
Low Credit Scores

Most traditional commercial loans have very strict standards for acceptable credit scores by the guarantors for a commercial real estate loan. Hard money loans are much more flexible and low credit scores are acceptable.

COMMERCIAL HARD MONEY LOAN SCENARIO # 2:
Need to Obtain Commercial Financing Quickly

Traditional commercial loans will normally require several months to complete. Hard money loans can be obtained within a few days in some situations. This difference will be critical if commercial financing is required within a short time frame.

COMMERCIAL HARD MONEY LOAN SCENARIO # 3:
Special Small Business Situations Not Easily Understood by Traditional Banks and Intermediate Lenders

Foreclosure
Bankruptcy

Special Purpose Properties
Tax Liens
Losses
Negative Net Worth
Less than one year in business
Environmental Requirements

For each of the three scenarios described above, a commercial hard money loan will involve shorter-term financing, higher fees and higher interest rates than a commercial loan from a traditional bank or an intermediate lender. However, the critical point which must not be overlooked is that for most situations covered by the three scenarios, commercial financing would be declined by either traditional banks or intermediate lenders. It is under these circumstances that a commercial hard money loan becomes a practical and viable solution for many small business owners.

Copyright 2005-2006 AEX Commercial Financing Group, LLC. All Rights Reserved.

Current Commercial Loan Rates

Commercial loan rates are essentially the combination of the underlying index and the margin that the funding bank or lender charges. Borrowers should be careful on the way that their term sheets are written in regards to quoted rates. Below are a few suggestions on how you can protect yourself against having your commercial loan rate increased (bait and switch) while in process.

First of all, an indexes commonly used in the commercial mortgage industry includes Prime and the 10 Year Treasury. Less well known indexes such as the 5 Year Swap or the FHLB indexes are becoming more popular.

The margin is where the bank makes its spread. It is a very complicated process for banks to figure out what to charge as they basically have to predict the future and take into account the probability of default, adequately cover their costs, and of course try to make a profit. At the same time the industry is highly competitive and they have to price out their loans "skinny" enough to be able to bring in new borrowers.

The combination of the margin and index is commonly referred to as the Effective Rate. It's what the borrower will use to calculate their payments and what they normally think of when they ask for rate quotes. For example if a bank quoted you Prime plus 1% your Effective Rate would be 6% as prime right now is at 5%.

The main suggestion regarding not having your rate bumped up on you while your loan is in process is to have both the margin and index clearly written on the term sheet. The opposite is to just have the effective rate quoted with no mention as to either the margin or the index. If either or both go down for example, you would not know, and would not know that your rate should be lower. The lender could simply keep your rate the same and you would have no recourse or really any way of knowing.

A worse scenario would be to have your rate increase during process. Rate locks are rare in the commercial mortgage industry so it is possible for the funding bank to call you with the bad news that your rate will be higher. In fact, as of this writing 5/8/8, it's not that uncommon at all, as banks are constantly rethinking what they can and what they want to lend on - due to the credit crisis. And many will have the attitude of, take it or leave it. More to the point though if the margin and index are not clearly known the lender could mention any margin or index when challenge to "cover" his story.

Get it in writing or assume they will try the bait and switch on your commercial loan rate.

Commercial Loans and Working Capital Lenders to Avoid

Avoiding critical problems is vital for a small business owner seeking help with commercial loans. Successful working capital management especially requires that problem lenders be avoided for business loans and commercial mortgage financing.

One of the most serious commercial loan situations is a small business commercial lender that causes problems for their commercial borrowers on a repeating basis. Commercial borrowers should be prepared to avoid certain problematic commercial lenders unless alternative working capital loan options are impossible.

This article will not name specific lenders to avoid. This article will focus on how important it is to avoid lenders that cause the problems described below. We will provide several examples to demonstrate why commercial borrowers should be prepared to avoid a number of commercial lenders when seeking commercial mortgages and small business financing.

I have been advising business owners for many years, and I have encountered many commercial loan situations which have involved commercial lenders that I would not recommend as a result. This conclusion is typically based on an obvious pattern of lending abuses by select business financing providers.

As a first example of lenders to avoid, I have published an article which discusses the tendency of many banks to say "yes" when they mean "no". Such banks will typically attach onerous business financing conditions to commercial loans instead of simply declining the loan. Business owners should explore other commercial mortgage alternatives before accepting commercial financing terms that put them at a competitive disadvantage.

The second example of lenders to avoid involves the commercial appraisal process. For commercial mortgage loans, commercial appraisals are an unavoidable part of the commercial loan underwriting process. The process to obtain commercial appraisals is expensive and lengthy. Avoiding commercial lenders which have displayed a pattern of problems and abuses in this area will benefit the commercial borrower by saving them both time and money.

The third example of lenders to avoid is illustrated by those which provide worthless pre-approvals for commercial loans. Many borrowers think it is important to obtain a business loan pre-approval. The apparent result of the preliminary business financing approval is that it will allow the borrower to make other business commitments which are dependent on the commercial mortgage being approved.

Commercial borrowers should expect that a valid approval will not be regularly issued in a day or so. Any form of commercial financing approval will be treated as a binding action by ethical lenders. Nevertheless there are commercial lenders who provide their own special version of a pre-approval within just a few days of receiving preliminary application information. Because this abbreviated approach to pre-approvals almost always produces unexpected surprises for the commercial borrower as the business loan process goes forward, commercial borrowers need to be extremely wary of any commercial lenders that take this approach.

Why would a lender use a questionable commercial loan pre-approval? Here are two primary possibilities. The first reason is to employ a pre-approval process that resembles the approach used for residential mortgage loans. A second reason is to cause borrowers to prematurely end their financing search due to the often false hope created by an artificial approval.

Since many commercial mortgage loans are arranged by residential mortgage brokers who are frequently unfamiliar with common commercial loan procedures, this reason will be especially applicable when dealing with commercial lenders that specialize in dealing with residential mortgage brokers. This type of commercial lender should be avoided at all costs for most business financing situations.

The fourth example of lenders to avoid is related to lack of sufficient lending competition. It is not unusual for the leading small business lender in some markets to use more restrictive commercial loan terms. Such lenders often take advantage of a lack of other local commercial lenders. It is not wise for borrowers to rely upon local and regional banks for most business financing requirements. A non-local lender can frequently provide better business loan terms for most lending scenarios because they are routinely competing with other business lenders.

Commercial Real Estate - Should You Lease Or Own?

Business owners often contemplate whether they should own the building their business occupies or lease it. Commonsense would dictate that the entrepreneur should buy their facility and "pay themselves" rent and thus build long term equity. Large decision like this, however are rarely that simple and have both objective and subjective factors that further cloud the question.

For example, objective factors include financial limitations (do I really have enough cash?), tax benefits (Does my business really make enough money to benefit from the tax shelters?), potential long term equity build up (Is my local real estate market growing or shrinking) or space growth needs (will I need to move to a larger building in the short term?). Subjective factors include business image, control or pride of ownership, etc. Forces outside of the business owner's control, such as the general economy, interest rates and future potential appreciation (or depreciation) complicated the question.

For many business owners the main question really comes down to A. do I have the required 10-20% to put down and B. can my business really afford to tie this cash into the property? Commercial real estate is not liquid. And once cash is put into it, there are only 2 ways to get it out. 1. Get a new loan 2. Sell the property. If buying a property means your business will be cash poor you may want to either put your purchase plans on hold, find a lower priced property or scrap them altogether.

As far as down payments borrowers can still get fixed rate financing at 90%. In fact it's still common to get 90% loan to cost financing. Meaning, if you were considering buying a property at $1,000,000 and it needed $300,000 in improvements/build outs. You could finance 90% of the $1,300,000 and would only have to come out of pocket $130,000.

Also, many business owners are curious if there would be a cash flow savings on their monthly payment by owner. The down payment and current interest rates normally answer this. Although obvious, the more the borrower puts down, the longer the amortization period and the lower the rate - the lower the monthly payment. But it's common right now with rates in the 6%'s to see a small cashflow savings if the loan is at 90% with a 25 year or more amortization schedule.

Another consideration besides the money is growth plans. If the business is in the beginning cycles and is expecting to expand rapidly than the business owner should have an idea of what he will do with the building once they move out - rent, sell or keep part of their operations in it. These are simple questions with complicated answers.

For example, if the plan is to lease out the property and move into a larger one, how long will it take to really rent it out. Who really knows? It's not uncommon to take 6 -12 months to rent out a commercial property. How painful will this be for the owner? Can he really afford this?

Advantages of Commercial Mortgages

While commercial development finance can be a funding option for developing commercial property, there is other side of the property financing that is more affordable and less risky. That is the commercial mortgages. Such financing can be a good start for entrepreneurs. Commercial development finance is already for those who need large amounts to arrange with companies providing development finance UK. Since it s still a far-off option, commercial mortgages can be beneficial just the same.

Companies that have the capability of getting commercial mortgages will be faced with many advantages. Aside from being able to own business property, there are also other advantages. This includes flexibility, investment opportunity, letting and tax benefits. Let's briefly explain each advantage:

* By using commercial mortgages to buy your property, it will give you a level of freedom over what you do with the building that you simply wouldn't get if you were to lease the premises, thus providing certain level of flexibility.

* There is also investment opportunity since it means buying your own business premises. You will be able to claim any profit that occurs from the sale of the building that you obviously wouldn't be entitled to if you were merely leasing the building.

* Letting is another great advantage. If your company expands and you move to larger premises, you can continue to make profit from the business premises that you acquired with commercial mortgages by continuing to let it out to another company.

* Finally, owning your business premises is also associated with a number of tax benefits for the companies. In some cases, business premises have the prospect of a 75% Capital Gains tax exemption which is considerably higher than the typical 5% associated with residential properties.

Commercial mortgages can be available in companies offering development finance UK. While these companies offer 100% development finance for large scale projects, they offer commercial mortgages appropriate for small to medium scale business ownership.

All About Commercial Mortgage Finance

Have you ever thought about starting your own business? If so, you've likely contemplated the high costs of renting or buying a business establishment. Although it may seem impossible, there are options for you. There are many sources for a commercial mortgage, but in most cases the credit worthiness of the business principals will play a key role in obtaining financing. In most cases, loans for property for a commercial business will be to acquire new property or a new building but they can also be made as an additional commercial mortgage for business expansion and growth. If the business itself has a good credit standing, but the business owners personally have bad credit, it could impact on whether the loan is seen as favourable or not.

Possibly the toughest commercial mortgage to qualify for will be for new businesses with owners of questionable personal finances. Whenever a company's principals apply for a loan, their personal finances are judged to create an opinion on whether the loan will be granted. If they have a sufficient credit history, most lenders will approve the transaction. Even with a good credit rating some lenders will require sufficient collateral to protect their interest in the amount of the loan as they usually do not consider a company's potential, rather they look at the owner's ability to make the payments since the business itself has no income at that time.

Applying for a commercial mortgage can be a lengthy process as the lender will consider all of the aspects of the business. While potential for income of the business is looked at, the actual income level is of considerably more importance. Additionally, if the business owner is relying on the business for their personally income, most lenders may be reluctant to loan money without being comfortable that the borrow can meet the loan obligation.

Some borrowers may believe that the only way they can get a loan is to show that they really do not need it, but some lenders are willing to take on the risk based on their belief in the individual requesting the commercial mortgage to buy new property in which to establish their venture. A person moving a small business out of their garage and into a larger facility to handle an increase in business, for example, will most likely be able to demonstrate the ability to pay back the loan. Even with an imperfect credit history, if it can be proven the business is making money, lenders may approve the loan with the stipulation that if the borrower defaults, the lender claims the building and, in some cases, ownership of the business.

However, most lenders are in the loan business and do not really want to get into the real estate business of selling foreclosed buildings and businesses, and are willing to work with borrows to allow them to try to work through any problems. This thinking also works in the borrowers favour when attempting to secure a commercial mortgage to increase the business size as well as capacity.

Hotel Loans - The Guidelines Are Changing

It's March 2008 and I'm currently working on a rate and term refinance, $3.8 million of an owner occupied Wingate Hotel in the Midwest. The owner boasts an 82% occupancy for 07, $2,000,000 of gross income, property was built in 02 for a cost of $5.3 million so we're looking at a loan to value of approximately 63-67% depending on the appraisal works out. No issues on the transaction like bad credit, liens, judgments - nothing. Slam dunk transaction, right? Find the best lender with the best terms, rate and call it a day.

Not so, of the top ten banks in this arena, rather than the enthusiastic expected response of the bank representative snoozing me for the package, I'm getting more of the "we don't want to create any more enemies right now" and the "we just really want to wait and see how the issue on Wall Street shake out before we start reviewing packages and quoting rates." Definitely a disappointing reality check to say the least.

The borrower on this particular transaction was quoted 6.5% on a nonrecourse, 5 year fixed, 10 year term, 25 year amortization loan from a major national hotel lender 3 weeks ago - that lender/deal has been taken off the table. The 7.5% -7.25% that I have been able to find has not been received well as the borrowers expectations where set in the mid 6's%.

In general, on a cash out basis, borrowers can now expect a max 65% if not more like 55% that's currently market. Rate and term refinances now need a good story and borrowers can expect to still get a loan closed at 70% but will get market rates/terms at 60-65%. DCR's that we could get away with at 1.3 now have been changed to a real 1.4.

Historically Hotel Loans come in and out of favor with lenders more so than with any other building type. There has been a tremendous amount of volatility in the market over the years and the banks seem to have already pulled the plug, for the most part.

More startling is that we have talked to many experts in this arena, on a daily basis, and everyone seems to be in a state of shock and confusion. Normally it's the wait 6 months and we should be back to normal. Currently it's more the attitude of "we don't know".

In general, if a hotel owner thinks that they may need to refinance and or purchase a new hotel, it may be wise to get started immediately as it may be a few years before we get back to rates/terms that we are still at today.

Commercial Subprime Mortgages

Although there is really no "commercial subprime mortgage" sector like there is in residential, there are 3 types of commercial mortgages programs that are designed for borrowers with difficult situations.

These loan programs include:

1. Stated income commercial loans
2 . Commercial hard money
3. SBA 7a loans.

Commercial Stated Income Loans

Commercial stated Income loans were designed for businesses or investors that do not show enough income on their tax returns to qualify for traditional loans. For example restaurants, automotive repair or other high cash businesses are prime examples of business that often make enough money to support the mortgage debt, but owners often do not report all earned income on their taxes.

The primary benefit of this program compared to other "subprime loans" is longer fixed period, with 20- 30 year amortizations schedules and high leverage (often up to 75% on refinances and even 90% loan to value on purchases).

The negatives include high prepayment penalties and rates are often 2 -5% higher than typical bank financing (though it won't be available to a borrower that didn't show enough income on their tax returns to qualify).

Commercial Hard Money

Commercial hard money loans are the ultimate "commercial subprime" loans for investors and occasionally for business owners. Hard money lenders are really interested in properties equity or the properties ability to pay the lender back in case of default. Loan to values rarely exceed 65% and values are often further reduced by tough appraisals.

The primary benefit of hard money is the speed in execution (3 weeks to close is not unusual) and lenders do not generally care about credit scores. The negatives with hard money include interest only rates in the 12-15% range with points in the 3-5% range.

SBA 7a Loans

If hard money loans are the ultimate "subprime loans" for investors, the SBA 7a loans are the ultimate for business owners. Highlights include the ability to refinance up to 90% loan to value, credit scores as low as 500 are acceptable, and debt coverage ratios can be as low as a 1.1 - with the ability to use projections for future income.

Common objection to the SBA 7a program include the floating rate and expensive guarantee fee that the SBA demands. Both of these negative characteristics can be eliminated though, for example there are banks that offer a 5 year fixed version with the ability to roll the guarantee fee into the rate.

FHA Section 221 Is The Best Apartment - Multifamily Construction Loan Program Available

FHA Section 221 is the best loan program in the marketplace today. Multifamily Developers are often amazed at the benefits this program offers them.

What Is This Program?

FHA Section 221 is a Federal mortgage insured program. It doesn't mean that the government is funding the loan...they are insuring it against default. Section 221(d) is a section under the Federal National Housing Act. It allows the FHA (Federal Housing Administration) to provide mortgage insurance to HUD approved lenders. This is to assist in the development or substantial rehabilitation of apartment or other types of multifamily rental properties. The loan program allows for long-term mortgages (up to 40 years) that can be financed with Government National Mortgage Association (GNMA) Mortgage Backed Securities.

Who Can Use The FHA Section 221 Apartment Construction Loan Program?

This program is available for both non-profit and for-profit borrowers. Under Section 221(d)(3), non-profit borrowers can receive an insured mortgage up to 100% of the estimated replacement cost of the project. Under Section 221 (d)(4), for-profit borrowers can receive a maximum mortgage of 90% the replacement cost estimate.

Eligible Property Types?

Most people mistakenly believe that this program is only for low income tenants...there are NO income limits. The properties can be market rate, LIHTC (low income housing tax credits), and bond properties. The properties can also be specifically used for senior or handicap tenants.

The property has to have at least 5 units and it can either be detached, semidetached, row, walkup, or elevator style. Non-apartment property types are also eligible for this program. Such as mobile home parks and assisted living facilities. The properties can also have limited commercial/retail space.

What Are The Benefits?

There are so many good benefits of using this program:


Term/Amortization - It is a 40 Year Amortization/40 Year Term (with no balloon).

Interest Rate - A low, fixed interest rate, based on market spreads over the Ten-Year Treasury Yield. The interest-only construction loan automatically converts to 40-year permanent loan. Both construction and permanent rate are fixed prior to the start of construction.

Loan To Cost - It is based on total replacement costs (including land) and it is 90% maximum (for-profits) and 100% maximum (non-profits).

Personal Liability - It is non-recourse for both the construction and permanent loans.

Equity Requirement - A Developer's Fee of 10% of cost can be allowed to be used towards equity requirements.

Debt Coverage Service Ratio - A minimum 1.10 DSCR.

Loan Amounts - There are no maximum loan amounts and minimum loan amounts vary by lender.

Occupancy Requirements - There are no occupancy requirements.

What Are The Downsides To This Program?

Loan Processing Time - With HUD approved MAP (Multifamily Accelerated Processing) lenders, the process can take 3 to 6 months. Non-MAP lenders can take 6 to 9 months.

General Contractor Requirements (GC) - GC's must conform with prevailing wage standards under the Davis-Bacon Act and have a project completion bond.

Prepayment Penalties - The prepayment terms are negotiable but they are usually a 5 year lock-out period then a declining prepay schedule after (5%, 4%, 3%, etc...).

As you can see the benefits of this program significantly outweigh the negatives. Developers can take advantage of this attractive financing and allow them to do larger projects.

Finance Your Business Using a Merchant Loan

In the midst of a credit crisis, tightening bank lending standards, and an economic downturn, alternative methods of business financing is one of the hottest topics amongst business websites and business magazines.

In its small business section, CNNMoney.com recently featured an article titled, "8 Places to Get Financing." Business Week has featured articles titled "Collecting Money in a Bad Economy," "Risky Financing for Cash Strapped Startups" and "Credit Cards Replace Small Business Loans," and all over the internet you will find articles offering small business financing tips for small business owners whose businesses are being affected by the economic happenings of today.

But even some of these alternative methods of business financing are becoming harder to get. In an article titled "Angel Investors Get Picky," Business Week's Amy Barrett writes, "Competition for startup cash is tougher than ever, and companies that might have sought venture capital in the past are turning to angels." But according to the article, even though the number of angel investors has increased, the amount lent has only increased very slightly and is expected to "hold steady" this year.

With that said, there is obviously a need for more available business financing, and to the advantage of merchants, there is another option; merchant loans, a way for merchant business owners to use their business's credit card sales to get funds for their businesses.

Lenders who provide merchant loans do so based on the borrower's credit card sales. In order to receive a merchant loan, a merchant's business must process at least $2,500 in monthly credit card sales. If the applicant meets this requirement, lenders will review the last four months of the business's credit card statements, and determine how much money that business qualifies to receive. The borrower can then receive that money in as little as ten business days.

You may already be sold by the ease in which merchant loans can be acquired, but it is the repayment process that makes merchant loans so suitable for owners of retail and service-oriented businesses. A merchant loan is repaid via a business's credit card sales. Meaning, every time a customer makes a purchase using a debit or credit card, a small percentage from that sale goes toward the repayment of the merchant loan. These repayments go with the flow of the business, making it easier on business owners who don't have to worry about a loan payment being too high for a particular month.

In a time when even the "alternative" sources of business financing are becoming harder to land, merchants have the upper-hand. Merchant loans are available for use with few requirements, and a simple repayment process that makes them ideal for merchant business owners.

SBA Loans - Not All Are Lenders Are the Same

A major misperception among business owners, regarding SBA loans is that they are all the same. Meaning, most business owners have the perception that all of the terms, processes and eligibility requirements are identical from one bank to the next. Although understandable, this simply is not the case.

There are many innovative lenders and banks that use the SBA guarantees to come up with some very interesting loan programs that can be a major benefit and or solution to business owners seeking commercial mortgages.

The SBA has received a bad wrap over the years due to its seemingly complicated and bureaucratic process. The assumption that many entrepreneurs have made boils down to that the SBA is basically just difficult to work with. Although true that the SBA does add on to the underwriting process, the key is to work with a lender that is an expert at dealing with the SBA guidelines, processes AND is set up as a national PLP (Preferred Lending Partner).

Working with a bank/lender that only dabbles in SBA loans is a huge mistake and you will pay for this in time, frustration and money as the process goes on and on. You want a lender that specializes in SBA loans - this cannot be overstated.

The presumption that all SBA loan programs/terms are the same is also wrong. For example, we do a lot of business with a SBA preferred bank that has many unique products that are guaranteed by the SBA. For example, they offer a 7a program that is fixed for 5 years and amortized over 25 years - the typically 7a loan adjust once per quarter. Further, this particular programs rate is simply PRIME - not PRIME plus 1-2.75%. The bank also absorbs the 2.5% guarantee fee that the borrower normally has to pay. So, even though your local banks may all offer the same vanilla programs, there are more options out there.

As far as eligibility, most corner banks that work with the SBA have the typical underwriting guidelines - minimum 680 fico scores, 2 years minimum business existence, borrower liquidity requirements, debt coverage ratios of 1.2, etc. This is also an area that some source choice to get innovative on. Another lender we work with will fund borrowers with scores as low as 500, will work with companies with DCR as low as .9 if the rest of the file has merit.

So, not all SBA lenders are the same.

Summary of Commercial Loans at 90%

Commercial loans at 90% though rare, are still an option. Owner occupants will have more 90% financing options than commercial real estate investors.

90% Commercial Loans For Investors

Straight 90% financing for investors, as far as we are aware no longer exists. 6 months to one year ago there were a few lenders that offered 90% financing but there rates where normally 1-3% higher than typical rates at 80% financing. The way investors still can structure 90% financing on investment properties is to have the seller hold a second lien position loan. Yes this might be obvious for you, but you should not just assume this is easy to get done. Most funding sources out there will not allow any type of second lien loans. So to find a bank that will allow this shouldn't just be blown off.

Besides just finding a bank will allow seller financing AND finding a seller that is willing to extend financing the property has to fit as well. In short the property has to be a bit of a "cash cow". The market for purchase investment properties is set at 75% to 80% financing. Having the additional 10% to 15% of debt will often put a properties cash flow under water.

In addition, banks will often raise their minimum Debt Coverage Ratio from say a 1.2 to a 1.3. And yes they will factor in the debt payments on both their loan and the seller second. So again the property has to be priced right with a high cap rate.

90% Financing for Owner Occupants

Business owners have more options than investors for 90% financing. There are really three sources to buy a property with only 10% down. The loan program come in different structures for example the Commercial 30 Year Fixed, Five Year Fixed 7a Loan and the SBA 504 program will all allow the buyer to acquire commercial property with 90% financing.

Each of these programs have their own pros and cons. For example the interest rates on the 5 Year Fixed 7a are the lowest and this loan program does not have any fees to do the loan. The Commercial 30 year Fixed boasts the longest fixed rates in the industry but the rates are the highest of the 3 options. The 504 loan is sort of in the middle with fixed rates often in 10 year range however the fees are more expensive than the other two options.

Understanding Large-Scale Commercial Mortgage Financing Part-03

This third and final installment of the mini series regarding large-scale commercial mortgage financing will generally discuss how to select a commercial mortgage broker or banker, issues you can expect to deal with and how to protect yourself in the process. If you have not read part 01 and 02 of this series, you should do so now.

As mentioned, the commercial mortgage brokerage business is not well regulated and there are many unscrupulous and crooked operators in the market--shysters who will require up-front fees before you get a loan. And depending on the amount of financing you are seeking, these fees can be substantial, typically one percent (1%) of the loan amount. In reality, there is no value in paying a commercial mortgage "broker" any up-front fees to get a commercial mortgage for a grade-A income producing property. Why? Typically, commercial mortgage brokers do not provide financing directly to the borrower. Instead, they tend to represent mortgage "banking firms", a much more qualified and professional level of operation, who represent life insurance companies in the market. Now, paying fees to mortgage banking firms is a different story because you are dealing with a legal representative of the insurance company providing the financing and applications fees are normally paid to these banking firms at the appropriate time (generally discussed in part 1-2).

Dishonesty, however, runs in both directions in this business and borrowers can be just as crooked as the brokers. For this reason, brokers often demand borrowers to sign non-disclosure/non-circumvention agreements (non-comps) to prevent the borrower from going around the broker directly to the lending organization. This is fair. The mortgage broker has taken time and money to develop conduit relationships with mortgage banking firms which you would not find own your own unless you are already a player with some deals under your belt.

Before you sign any agreements with a broker, make sure you get legal review, even if you think that you understand the agreement. Many non-comp agreements tend to run in perpetuity and can bind you for a long, long, time from ever seeking financing own your own without the broker. There are a variety of non-comps floating around and some are better than others. Make sure you have an attorney review them before signing. If you do sign a non-comp, makes sure you get a registered list of the broker's lenders, in writing, so that you are limited only to their current source of lenders. This way you can deal with lenders not on the list directly.

The only time it is reasonable to pay a broker a fee, and I was in the business for quite awhile, is if they are preparing loan request packages for submission to banks (typically business and/or construction loans). Another occasion to pay fees if the broker is consulting and advising you for the assembly of legal and financial documents needed to facilitate a loan. In this case, there may be some justification for fees and it is a matter of what you are willing to pay. What's the hourly rate worth? That's a gut call, around $50.00 hour for every actual billable hour with per-project limits pre-set to say $250.00. When they hit the $250.00 mark, you want to see an audit trail of the billable schedule before authorizing another $250.00 project. Always work in phases to maintain control. What does a bank package cost? For business and construction loans it is not uncommon to pay $1,500 to $5,000.00 or more depending on the size and complexity of the deal. There is a big difference between a $100,000.00 construction loan and a $1,000,000.00 loan.

As with any business relationship in which you find yourself pressed to sign legal documentation it is always a good idea to get legal review first. I have repeated this many times throughout these articles because many people ignore this advice until they sign a document, and them it is to late.

To your success!

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Copyright © 2006 James W. Hart, IV All Rights reserved

Current Restaurant Loans Options

Restaurant owners have limited options for commercial mortgages, relative to other businesses and building types. One of the most common options is the SBA loans. Although not perfect, they can be a viable option. For one, they are still reliable and are still closing. Two, they do offer some of the lowest fixed rates available and the highest level of financing for restaurant loans.

Interest rates for restaurant loans are currently in the mid 6%'s to mid 7%'s depending on the particulars of the transaction. Combine that with 85% financing on purchases AND 85% financing on refinances and it is easy to see why the SBA has had such a huge impact on American Small Businesses.

Compare that to traditional bank financing, rates are about the same, but you would have to come out of pocket 30-40% of the purchase price. Refinance financing is more limited and harder to close and loan to values are normally capped at 50-60% as well. Again with the SBA programs you can go up to 85% loan to value on refinances on restaurant loans.

The SBA programs have received a lot of criticism over the years, some of it warranted, some of it not. One of the biggest complaints is the time frame and bureaucratic process. A key to avoiding the long delays is to work only with PLP lenders. If you do not your loan will have to be underwritten and approved twice, once by the funding bank and secondly by the SBA. If you work with a PLP lender the loan will only have to be underwritten once, and you will avoid at least one month of delays. It is common to close SBA loans in 60 days which is right in line with all commercial loans.

Another major criticism is that the fees are excessive. The SBA 7a loan normally has a 2.75% front end "SBA Guarantee Fee" and the 504 has a 2.5% fee for its half of the loan. However it is important to realize that not all lenders and the way they structure deals are the same. For example we work with a bank that will absorb/pays for this fee for the borrower. So the borrower gets all of the benefits of a long term fixed rate loan with zero fees.

In terms of fixed rates it depends on how the loan is structured. With the SBA 504 you can easily get 7 to 10 year fixed rates, with 25 year amortization schedules. With the SBA 7a most are floating, however it can be offered as a 3, 5 and though rare, 10 year fixed rates. We are currently working with two banks that offer the 7a as a 5 year fixed loan for restaurants. Again, as a comparison most bank financing will not exceed 3 -5 years, and the amortization schedules rarely exceed 20 years with loan to value restrictions at 50 060%.

The SBA programs can provide a lot of flexibility compared to conventional bank financing. Again, keep in mind that not all lenders/banks that use the SBA guarantee are the same. So, if you have been turned down by a bank that offers SBA loans, it does not mean that you are ineligible for SBA financing, it may just mean that the actual funding bank, didn't like your deal. The SBA is not the lender, they are guaranteeing the loan for the funding bank in case of borrower default. At the end of the day the bank is still on the hook for the loan and banks appetite for deals and guidelines vary widely. And the way that banks structure the loans vary as well. Again, for example 99% of banks offer the 7a as a floating rate, we however have access to a 5 year fixed, 7a program.