Excellent Top Valor Commercial Loans
Are you looking for a Commercial Loan? Look no more! Valor Lending has the perfect program for you! Excellent Top Valor Commercial Loans are in an entirely different category than residential lending. Commercial property loans are often vastly different than loans for residential properties. Although they both pertain to real property and sometimes even income-producing property on the 1-4 unit residential side, commercial loans are more complicated than residential loans. Valor Lending has Excellent Top Commercial Loans available now.
There are two main reasons Excellent Top Valor Commercial Loans are so different from residential property loans:
- The numerous types of commercial properties that exist
- The value of the commercial property.
A wide variety of properties would fall under commercial property loans, including office buildings, multifamily (5+ units) apartment buildings, warehouse, and retail centers. Commercial properties include self-storage facilities, automotive, industrial and light industrial, hospitality (motel/hotel), mobile home parks, daycare centers, raw land, agricultural properties, churches, and other special-use properties.
Securing a commercial loan vastly differs from that for a primary residence or even a 1-4 unit investment property. Here is everything you need to know about obtaining a commercial loan to fit your needs.
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A. What is a Commercial Loan?
Finding Commercial Loans is different from 1-4 unit residential mortgage lending.
The primary difference lies in the ways in which the properties are valued. Whereas traditional residential properties are generally valued based on a sales comparison approach, commercial properties are valued based on current and future income-producing potential. The income produced by a commercial property is the driving factor behind a commercial property lender funding decision.
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.
B. 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 primarily 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 not always) 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
Commercial 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 generally 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. Finding the best commercial mortgage loan in the hard money sector is not as complicated as someone may think.
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 personally 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.
C. 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 Loans
FDIC-insured institutions such as banks or credit unions offer conventional commercial loans. Any commercial property can qualify for a conventional 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 and/or guarantor and a minimum debt service coverage ratio (DSCR) above 1.15 or even higher, depending on the loan program.
Commercial loans often require a personal guarantee, with business and personal tax returns requested from the sponsor and/or guarantor showing at least 2 years of profit history.
2) Stated Income & Bank Statement Commercial Loans
Bank Statement and Stated Income Commercial Loans are outside conventional commercial underwriting guidelines and are not repackaged and sold on the secondary securities market. Instead, they are on lenders’ portfolios, 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 side. 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 true income or purchasing power because many business owners take advantage of all available legal deductions.
(b) Commercial Stated Income Loans (P&L Only Loans)
As an additional alternative to using tax returns or bank statements to qualify for a commercial property loan, sponsors may take advantage of commercial stated income loans. Sometimes called “P&L Only Loans,” income is stated using a CPA-prepared profit and loss statement.
Commercial stated income loans typically have slightly higher rates due to the increased risk lenders take on by dispensing with income verification requirements. The trade-off for sponsors is that without this requirement, underwriting moves quicker, and commercial stated income loans can fund quicker 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 a quick close is needed, a property is not currently at its maximum income-producing potential, or the sponsor is unable or unwilling to produce tax returns and other financials.
(a) Speed – Same-as-Cash Purchasing Power
One of the main reasons to use commercial hard money loans is their speed. Hard money loans can be closed much quicker than conventional or more traditional loans, often 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 and traditional 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/or stabilization. They charge higher interest rates and points to mitigate the increased risk 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 plan to purchase an underperforming strip mall with many vacancies. Doing a gut rehab and filling the finished units with tenants paying the new market rents for the property.
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 has reached its total income-producing capacity or becomes “stabilized,” the hard money loan can be paid off in one of two ways.
- 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 guarantees 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 can often be used to purchase not only land and existing structures but also to make lot improvements, renovate, or even construct 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 that do not have a lot of 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
These loans are for well-qualified borrowers, and high-quality stabilized properties are preferred, although construction and development projects are considered. Life company loans are made by life insurance companies or groups of life insurance companies and are generally the most conservative of all commercial property loans.
CMBS Loans (Commercial Backed Security Loans)
(“CMBS Loans”) are non-recourse loans pooled together and securitized by offering bonds collateralized by the financed properties. These do not require tax returns or global cash flow analysis.
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D. Commercial Loan Underwriting
Commercial mortgage loans focus on two primary categories:
- The financial picture of the property (and sometimes also the operating business(es))
- The financial picture of the sponsor or sponsoring entity or entities.
1) Commercial Property Financials – How to Value Commercial Property
A commercial property’s potential income production will determine its value. Stabilized properties are properties that are income-producing at their highest and best use.
The relevant income here is the property’s net income (as opposed to gross income). A commercial property’s net operating income (“NOI”) equals its total revenue minus operating expenses.
(a) NOI (Net Operating Income)
The total revenue of a property, less its operating expenses, is the net operating income (NOI).
The property’s rent roll determines the NOI of the property. The rent roll will include info such as which units are occupied and for what amounts, lease dates and terms, security deposit info, and other fees collected from tenants (parking, laundry, etc.), and it provides a good idea of the economic situation of a property.
(b) DSCR (Debt Service Coverage Ratio)
The Debt Service Coverage Ratio, or DSCR, is designed to help lenders determine a sponsor’s ability to repay. Essentially, it measures the current cash flow’s ability to pay the current debt obligations.
The DSCR ratio compares a property’s net operating income (NOI) to the annual loan payment. To calculate DSCR, divide the NOI by the annual debt service. For instance, if your NOI is $300,000 and annual loan payments are $175,000, the DSCR = 1.71 ($300,000 NOI / $175,000 Debt Service).
A DSCR greater than 1.00 indicates positive cash flow, meaning the NOI is sufficient to meet all debt obligations (a negative DSCR indicates negative cash flow). The higher the DSCR, the better the investment.
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(c) Appraisals
Because commercial properties are so much more complex than residential properties, commercial appraisals typically take 2-3 weeks to complete. This is because appraisers must consider several variables in determining a property’s value.
Commercial appraisals are also more expensive than residential appraisals. They can easily range between $2,500 and $5,000 due to the complexity of the document, the length, and how long it takes to complete. Commercial appraisals are much more detailed than residential appraisals.
2) Commercial Property Sponsor
While commercial loan underwriting does focus on the income performance of the property. The financials of the borrower and/or borrowing entity still have some relevance in the equation.
Commercial property loans are often made to business entities, such as an LLC, corporation, trust, etc., called the “sponsor.” Guarantors are individuals who personally guarantee a loan.
Similar to residential mortgage transactions in which lenders review the following:
- Personal credit
- Income of a borrower
- Sponsor’s income
- Credit history
- etc.
They use these and more to form the basis of a commercial property lender’s funding decision. To demonstrate an ability to make payments, Sponsors must generally have good credit, significant net worth, and liquidity.
E. Applying for a Commercial Loan
Commercial lenders and their loan programs vary as widely. The process of securing a commercial loan is a vastly different process than that for a residential loan. Borrowers should consider many factors in applying for a loan, including loan features, pertinent tax considerations, and economic conditions.
The commercial loan application and underwriting process are longer and more involved than residential loans. Commercial lenders are more interested in getting to know the financials of sponsoring entities to feel more comfortable extending funds. The more relevant financials that can be provided in a commercial loan transaction, the more favorable the terms.
F. Finding The Right Commercial Property Lender
Commercial property loans are more complicated and lengthier than residential loans. Many commercial property sponsors and borrowers are not experts in commercial property financing. Commercial mortgage professionals not only procure funding sources but also act as advisors. With the ability to match borrowers with lenders because they know what the market will support.
With so many commercial loan options, shopping around and getting the best deal is vital. Working with a broker with knowledge of and access to all available loan programs is best. Commercial mortgage brokers will assist every step of the way to submit loan applications with the best likelihood of success.
Commercial property loans are an excellent way for investors and business owners to expand their profit-making potential. With so many great options and terms, it is essential to conduct proper due diligence. Find the best commercial property loan and the best lender for your needs.
G. Bottom Line of Top Commercial Real Estate Financing
There are many types of commercial mortgage loans, which can be broadly grouped into four categories:
- “Full Doc” Conventional Commercial Loans
- Stated Income & Bank Statement Commercial Loans
- Hard Money Commercial Loans
- SBA (Small Business Association) Loans
Commercial property lending is more complex than traditional residential property financing. Valor Lending Group can help you with the complexity of your commercial loan scenario today.
Excellent Top Valor Commercial Loans | Call or Email Me Today!!!
Recap of our Valor Loan Products:
- Hard Money Loans (20% down / minimal documentation) are Typically funded in 7-10 days.
- Stated Income Loans (Great for business owners and self-employed) No tax returns!
- 100% financing is available (we can cross-collateralize other properties if there is enough equity)
- Valor VA Home Loan 100% financing up to $1.5MM
- Rental Property Loan – No tax returns or DTI calculation! Based on the subject property’s cash flow – No DSCR Coverage is needed!
- Flipper & Rehab Loans (Flip a property with one of our many options)
- 2nd Position Loans up to $5mm
- Raw Land & Lot Loans
- Ground-up Construction for spec homes, custom homes, and commercial ground-up.
- Farms, Vineyards, Ranches, and Agricultural Properties (25-30% down)
- 10% down Jumbo’s up to $1.5mm
- Manufactured Housing / Mobile Homes (20% down / 600+ credit score)
- Acreage Properties
- Commercial Loans up to $500mm
- 3% & 5% down Conventional Loans– LPMI (Lender paid mortgage insurance)
- Foreign Nationals Loans (no social security or residency required)
Other Programs we Offer:
- Conventional Conforming Loans
- High Balance Conforming
- Jumbo Loan Financing |10% down Jumbo to $1.5mm
- FHA, USDA
- Reverse mortgages up to $1 Million in Value
- Cash-Out Refinancing
*Terms and conditions can change daily without notice
Valor Lending Offers Every Loan In The Book!
We fund nearly every loan in the book and with dedicated customer service. We assure you of excellent communication throughout the loan process to ensure your loan closes smoothly and on time.
I look forward to the opportunity to serve you!
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