Valor Commercial Loan Options | Valor Lending Group
Are you interested in acquiring a Valor Commercial Loan? What you need to know about What is Commercial vs. Residential Property Loan | What Is The Difference? Let’s take a closer look.
What is a Commercial Loan?
Finding the best commercial mortgage loan is a different ball game than 1-4 unit residential mortgage lending.
The primary difference lies in how the properties are valued. Whereas traditional residential properties are generally valued based on a sales comparison approach, commercial properties are based on current and future income-producing potential. The income produced by a commercial property is the driving factor behind commercial property lenders’ funding decisions.
Determining a commercial property’s qualifying income can be difficult, involving a detailed look at the property’s financial situation. Again, the types of commercial properties can vary widely. For example, they can range from apartment buildings to industrial warehouses or retail strip malls. Therefore, underwriting a commercial loan can be as complicated as the financials of the underlying property.
In addition, of relevance to commercial loans are the financials of the business or businesses operating at the commercial property. At least in the owner-occupied context, because of the second key component of commercial loans-evaluating the strength of the borrower, also referred to as the transaction’s “sponsor.”
The options for ways to structure a commercial loan vary. Commercial mortgage loan terms are more expansive than available for 1-4 unit residential properties and can quickly become overwhelming even for savvy real estate investors.
Key Distinctions: Commercial vs. Residential Property Loans
Commercial loans are riskier and more complex than residential loans. Here are some of the critical distinctions between residential and commercial property loans.
1) Underwriting – Evaluating the Strength of the Transaction
Commercial loans focus primarily on a property’s current and future income-producing potential (as opposed to focusing mainly on the borrower’s income on the residential side).
2) Down Payments & Loan-to-Value (LTV)
Commercial property lenders generally approve a loan-to-value (“LTV”) that is less than what borrowers are accustomed to on the residential side, meaning higher down payments and lower leverages.
3) Commercial Loan Costs
Commercial loans will typically (although only sometimes) come with higher rates, a higher down payment, and shorter terms (which will increase monthly payments). Interest rates and costs vary depending on the lender and LTV, Debt Service Coverage Ratio (DSCR), and After-Repair-Value (where applicable).
In addition, commercial loans often come with appraisal and environmental/toxic report costs, which can be significant.
4) Commercial Loan Terms & Prepayment Penalties
Finding the best commercial mortgage loan in the hard money sector is more accessible than someone may think. Commercial property loans have terms of generally 6-36 months for hard money commercial loans and 5-20 years for permanent commercial loans. The best commercial mortgage hard money loans typically consist of interest-only payments, and permanent commercial loans often have an amortization schedule longer than the loan’s term. In both cases, a balloon payment is due at the end of the loan’s term.
Since 2010, Dodd-Frank has prohibited prepayment penalties on owner-occupied loans in the residential 1-4 unit arena. But for commercial property loans, prepayment penalties are more common.
5) Identifying the Sponsor in a Commercial Loan
Commercial loans are often made to business entities, such as an LLC, corporation, partnership, or trust, also called the “sponsor.” The sponsor is the entity or individual to whom the loan is made. If the sponsor is an entity, commercial property lenders sometimes require an individual (or individuals) to guarantee the loan, called “guarantors.”
A personal guarantee means the guarantor is responsible for paying back the loan in the event of default, even if a business entity is the note holder. This is considered a recourse loan, which allows the lender to look to the personal assets to satisfy the loan in the event of default.
In a non-recourse loan, on the other hand, if the sponsor fails to make payments, the lender’s only remedy (recourse) is to take back the property and sell it.
Common Types of a Commercial Loan
There are many types of commercial mortgage loans, which can be broadly grouped into four categories: (1) “Full Doc” Conventional Commercial Loans; (2) Stated Income & Bank Statement Commercial Loans; (3) Hard Money Commercial Loans; and (4) SBA (Small Business Association) Loans)
1) “Full Doc” Conventional Commercial Loan
FDIC-insured institutions such as banks or credit unions offer conventional commercial loans. Any commercial property can qualify for a conventional commercial loan.
These loans often have the best rates but are among the hardest to qualify. Conventional lenders require global debt-to-income (DTI) ratio calculations for the sponsor or guarantor and a minimum debt service coverage ratio (DSCR) above 1.15 or even higher, depending on the loan program.
These loans often require a personal guarantee, with business and individual tax returns requested from the sponsor and guarantor showing at least two years of profit history.
2) Stated Income & Bank Statement Commercial Loans
Bank statements and stated income commercial loans are outside conventional commercial underwriting guidelines. They are not repackaged and sold on the secondary securities market.
Instead, they are held on lenders’ portfolios. Thus, why they are sometimes called “portfolio loans.”
(a) Commercial Bank Statement Loans
Commercial bank statement loans contain a similar analysis used on the residential owner-occupied bank statement loan. Instead of tax returns, the sponsoring entity can supply 12-24 bank statements showing sufficient cash flow to pay for the requested commercial loan.
Commercial bank statement loans are an incredible financing vehicle for small business owners, whose tax returns often do not accurately reflect a sponsor’s actual income or purchasing power because many business owners take advantage of all available legal deductions.
(b) Commercial Stated Income Loans (P&L Only Loans)
An alternative to using tax returns or bank statements to qualify for a commercial property loan, sponsors may take advantage of a commercial stated income loan. They are called a “P&L Only Loan,” where income is declared using a CPA-prepared profit and loss statement.
Commercial stated income loans typically have slightly higher rates. This is due to the increased risk lenders take on by dispensing with income verification requirements. The trade-off for sponsors is that underwriting moves more quickly without this requirement. Thus commercial stated income loans could fund faster than more traditional conventional commercial property loans.
3) Commercial Hard Money Loans
Every well-equipped borrower’s toolbox should have a reputable commercial hard money funding source. Conventional lenders have loan committees and a more involved underwriting process, which can delay the process and do not allow for the same flexibility commercial hard money loans can offer.
Commercial hard money loans are a great option when:
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- A quick close is imperative
- A property is not currently at its maximum income-producing potential
- The sponsor is unable or unwilling to produce tax returns and other financials.
(a) Speed – Same-as-Cash Purchasing Power
The main reason to use commercial hard money loans is their speed. Hard money loans are often closed much more quickly than traditional loans – usually in 2-3 weeks, sometimes quicker.
Some of the best commercial hard money lenders can make underwriting decisions and issue a term sheet on the first phone call.
(b) Temporary Financing Needs – Value Adds & Property Stabilization
Properties at their total income-producing capacity are described as being “stabilized.” Most conventional commercial property lenders require a property to be stabilized to fund a loan. Commercial hard money lenders, on the other hand, do not.
In addition, Commercial hard money lenders will lend funds for renovation and stabilization and mitigate the increased risk they charge higher interest rates and points than conventional commercial mortgage lenders.
Secondly, Commercial hard money lenders will set maximum loan amounts based on the anticipated stabilized value of a commercial property. The sponsor has to demonstrate a clear path to stabilization. For example, a commercial real estate investor might purchase an underperforming strip mall with many vacancies, do a gut rehab, and fill the finished units with tenants paying the new market rents.
Finally, Commercial hard money lenders are willing to provide temporary financing in these situations based on increased return on investment and a demonstrated viable exit strategy. Once the property reaches its total income-producing capacity and is rated “stabilized.” At this point, the hard money loan can be paid off in one of two ways:
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- Sell the property
- Refinanced the property once stabilized.
(c) Sponsor Financials Currently Less Than Perfect
Commercial hard money lenders are far less concerned with credit issues and, across the board, have less stringent underwriting guidelines.
Sometimes, a sponsor cannot provide the documentation traditional lenders require, whether due to the nature of their business or the fact that tax returns may not accurately reflect the current financial situation.
Hard money lenders are willing to look past credit issues within reason. This is possible if the property has enough equity or a borrower has enough cash reserves to service the debt.
4) SBA Commercial Mortgage Loans
The U.S. Small Business Administration provides guarantees for certain commercial property loans through two loan programs: SBA 7a Commercial Loans and SBA 524 Commercial Loans. These loans are available only for owner-occupied commercial properties. For example, hotels and self-storage facilities are eligible, while apartment buildings are not.
SBA Loans facilitate purchasing land and existing structures, making lot improvements, renovating, or constructing new facilities.
The benefits of SBA Commercial loans include reduced down payment requirements and serving businesses in underserved markets. Sponsors can finance up to 90% of the property cost, plus improvements.
While SBA commercial loans often offer competitive and even below-market rates and terms, they involve a lengthy approval process that can take up to 120 days or longer. Owners with limited liquidity for a large down payment would look for this type of loan.
5) Other Commercial Mortgage Loans
There are as many different types of commercial property loans, and they are as unique as the various commercial properties. A few of the more commonly seen commercial loans include:
Freddie Mac Multifamily Loans. These are available for loans above $1,000,000 and properties in large metropolitan areas. Freddie Mac Multifamily Loans offer competitive rates and incentives to provide affordable housing.
Life Company Loans. Life insurance companies or groups make this type of loan. They are generally the most conservative of all commercial property loans. A Life Company loan is for well-qualified borrowers and high-quality stabilized properties. Also considered are construction development projects.
CMBS Loans. Commercial Backed Security Loans (“CMBS Loans”) are non-recourse loans. CMBS loans are bundled and securitized by offering bonds collateralized by the financed properties. CMBS loans do not require tax returns or global cash flow analysis.
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