NEVADA COMMERCIAL PROPERTY FINANCING

As a broker, I have access to hundreds of commercial lenders.  If you've been turned down by a bank for your commercial property financing, call us.  Our lenders finance most property types, including gas stations or bars.  Many also have lower documentation requirements then banks.  If you are new to borrowing on a commercial property, here a few things to keep in mind:

1. With commercial properties, the properties qualify the loan...not the borrower. Lenders concentrate primarily on the income produced by the property to determine the financing risks. They will determine if the property will generate enough income to cover the expenses and the mortgage debt. If the income calculations re enough to cover all expenses, then the property will qualify for the loan amount requested.

2. When you lease commercial property, your tenants are professionals and the leases are longer.  Unlike residential real estate, where tenant excuses and non-payment of rent occur often, you will find commercial tenants to be conscientious and dependable. They are in business, just like you and like to be treated like business professionals. With these tenants and leases, they can be long term (3-15 years) and the they can be written so that the tenant pays for maintenance, taxes and insurance.

3. With commercial properties it’s all about the numbers!  The property must have sufficient cash flow to comfortably manage the mortgage debt.  Most lenders use what is called debt coverage ratio, or DCR, to figure this. To calculate this ratio, subtract all of the operating expenses from the rental  income (This figure is the net operating income, or NOI) and divide that figure by the monthly mortgage payment for principal and interest.  A ratio of 1.2  is common for multifamily properties.  Ratios of 1.3 are common for other types of commercial properties.  If the property is owner occupied, many lenders will use a lower ratio, often 1.0. Keep in mind that all lenders will adjust the rental income using a vacancy factor for the area the property is located, whether you have vacancies or not.   If the DSR does not meet the required ratio, there are special lenders that will use your own disposable income to assist in making the commercial loan payments.

4. Rates on commercial properties are higher than residential mortgage rates.  They do not typically change as rapidly as residential rates since the loans are either kept with the lender or sold off to Wall Street investors.  Like residential loans, however, the ltv, property type, DSR, and document type impact the rate you will receive.  Rates on full doc loans are typically less than on stated income loans since there is less risk to the lender.

5. Commercial loans can be amortized over 10, 15 or 30 year time periods.  They are typically fixed for 1, 2, 3, 5, 7, or 10 years with occasional 15 or 30 years. 

6. All commercial lenders attach a prepayment penalty to their loan.  This is because the loans are often sold to Wall Street investors with a guaranteed return.  If you pay the loan off too early you will be penalized anywhere from 3 to 5% of the outstanding loan balance plus any interest due.  Each lender has different penalty requirements. Commercial loans typically can be assumed if you sell the property with no prepayment penalty. Some lenders will allow you to buy out of the prepayment penalty which results in a higher initial rate.

7. Lenders categorize properties into 4 types or Tiers. The property Tier has an impact upon the LTV, interest rate, DSR required, and level of risk assumed by the lender. The higher the tier rating, the riskier the loan.

   Tier 1	Tier 2	Tier 3	Tier 4
   Multifamily	Mixed-use, commercial	Rooming houses	Restaurants
   Mixed-use, residential	Office	Light industrial >25000 SF	Unflagged hotel/motel
   	Retail	Heavy Industrial	RV parks
   	Warehouses	Flagged hotel/motel	Mobile home parks, >25% RV
   	Light industrial <25000 SF	Auto Service	Nursing home
   	Bed & Breakfast	Funeral home	Assisted living facility
   	Mobile Home Park <25% RV		Day care center
   	Public storage		Flea market
   	Veterinary clinic		Car wash
   			Parking garage
   			Special purpose

8. Commercial appraisals typically cost more that residential appraisals.  They are more complex, require more research, often exceed 50 pages in length, and typically range in price from $1500 to $3000 depending on the property type and location.  The lender orders the appraisal and usually sources three bids and chooses the least expensive.  Appraisers use three methods to determine the value of a property--the replacement cost, comparable sales, and the income approach.  Since commercial loans are based upon the ability of the property to support the debt, lenders place the most emphasis upon the income approach to determine value.

9. All commercial properties are insured for environmental risks.  Insurance companies maintain databases of properties that may have environmental issues.  If the property you wish to finance is in this database you will have to either remedy the issue or demonstrate that the risk has been eliminated.  Part of the loan application process is the completion of an Environmental Risk Survey.  

10. Lenders want to be sure that you have extra money (reserves) in either a bank, IRA, or 401k after the purchase or refinance of a property.  Six months is common and is based upon the amount of the principal and interest payment of the new mortgage.  The reserves are extra insurance for the Lender just in case you experience a short term cash flow problem.

11. The closing costs on a commercial loan typically run from $10,000 to $20,000 and vary widely depending upon value, location, lender, and property type. The lenders fees and attorney fees are usually higher than the closing costs for residential mortgages.  Most lenders also require you to escrow taxes and insurance with your mortgage payment.

12. Approvals generally take a little longer for a commercial loan then for a residential loan.  The application, credit report, and income documentation or financials, if required, are faxed to a number of lenders for review.  They review the information and  issue a conditional loan approval or reject the application.  The conditional loan approval, or CLA, will state the interest rate, term of the loan and stipulate any prepayment penalties.  You will be asked to review the CLA and if acceptable, the next step will be to order the appraisal.  The appraisal fee will be required along with the signed CLA and an application fee before the appraisal is ordered.  Appraisals may take as long as 2 to 4 weeks depending on the property and market conditions.  During this period any additional documentation the lender requires will be collected and forwarded to their underwriters.  If you are purchasing a property, a signed purchase and sales agreement along with photocopies of any earnest money deposits will be required. Once the appraisal is received and reviewed by the lender, a loan approval will be issued and a closing date determined.  The entire process often takes 30 to 60 days, granted everything goes smoothly. 

We take a team approach to your commercial financing needs.  We work together to ensure your loan goes smoothly and you will always be able to reach at least one of us if you have any concerns along the way.  Call us and set up an appointment today!