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

Conventional commercial loans are offered by FDIC-insured institutions such as banks or credit unions. Any type of commercial property can qualify for a conventional loan.

These loans often have the best rates, but they are also among the hardest to qualify for. For starters, conventional lenders require global debt-to-income (DTI) ratio calculations for the sponsor and/or guarantor, as well as minimum debt service coverage ratio (DSCR) above 1.15 of even higher depending on the loan program.

These 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 of conventional commercial underwriting guidelines and are not repackaged and sold on the secondary securities market. Instead, they are held on lender’s portfolios, why they are sometimes called “portfolio loans.”

(a) Commercial Bank Statement Loans

Commercial bank statement loans contain a similar analysis as is 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 make payments on 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 referred to as “P&L Only Loans”, in which income is simply 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, both of 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 other more traditional loans often in 2-3 weeks, sometimes quicker.

Some of the best commercial hard money lenders can make their underwriting decisions and issue a term sheet on the first phone call.

(b) Temporary Financing Needs – Value Adds & Property Stabilization

Properties that are at their full income-producing capacity are described as being “stabilized.” Most conventional and other traditional commercial property lenders require a property to be stabilized in order to fund a loan. Commercial hard money lenders, on the other hand, do not.

In addition, Commercial hard money lenders will lend funds to be used for renovation and/or stabilization and to 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 plan to purchase an underperforming strip mall with many vacancies.  By 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 coupled with a demonstrated viable exit strategy. Once the property has reached its full income-producing capacity, or becomes “stabilized,” the hard money loan can be paid off in one of two ways.

1. 1. Sell the property
   2. 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.

There are times when a sponsor is simply unable to provide documentation traditional lenders require, whether due to the nature of their business, or the fact that tax returns may not be an accurate reflection of the current financial situation.

Hard money lenders are willing to look past credit issues within reason. This is possible if there is enough equity in the property 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 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 are as unique as the many various types of commercial properties. A few of the more commonly seen commercial loans include:

Freddie Mac Multifamily Loans. These are available for loan amounts above $1,000,000, and for properties in large metropolitan areas. Freddie Mac Multifamily Loans offer competitive rates and also incentives to provide affordable income 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 that are pooled together and securitized by offering bonds collateralized by the financed properties. These do not require tax returns or global cash flow analysis.