Info For Commercial Lending

[Dominique Coffin]

Hello All! First post on here!

My wife and I recently invested in our first multi family property last year and are looking for our next one. We are looking at a 5 unit complex which will obviously require commercial lending. I’m going to talk to some different lenders this week but was looking to get some advice first. I know everything will depend on different factors (income/debt, experience, credit, etc.) but I am wondering what is the best type of commercial loan to go with? What is a good interest rate right now? Any other advice you have?

Also a side note is this property is a duplex and a triplex on the same lot. I am debating if I get it to sub divide and then refinance with residential loans. I would then have two properties to pay taxes and I’m sure some other things I’m not thinking of, but any advice on this would be appreciated as well.

Thanks for the time BP community!

[Ben Firstenberg]

Commercial lending is a lot more complicated than residential. When you say "What's the best type of loan to go with" that's a little bit like asking "What's the best city to invest in?". It's a great question, but it's just hard to answer without fully understanding your situation. Based on what you've said, though here are some thoughts:

1. If you're planning to subdivide, make sure the loan has language for releases. Commercial lenders are very particular about what the collateral is. They typically don't let you subdivide and pay off parts of the loan separately unless you request it upfront.

2. On a similar note, if your plan is to subdivide, make sure to understand what the prepayment penalties are. Commercial lenders generally don't let you prepay your loan the same way residential lenders do. Sometimes you can pay extra for prepayment flexibility, so if that's important to you, be sure to ask about it. 

3. Are you willing to offer recourse? That is, are you willing to be personally liable for the loan in the event of default? Banks typically require recourse, but other lenders might not. Given your credit and experience, you may not have a choice, but just be aware of what you're signing up for. 

4. Be aware as well that commercial lenders sometimes can do fixed rate at lower leverage or floating rate at slightly higher leverage. So if leverage is important to you, you could request a floating rate quote. 

As far as a typical interest rate, that's also a really tough question to answer. It depends on your credit, the quality of the property, the length of the loan term, the type of debt you use and the institution you borrow from. It may also depend on your relationship with that institution, especially if it's a bank. In general, commercial loans are priced relative to treasuries (fixed) or relative to SOFR (float). Floating rate debt for someone in your situation might be somewhere around SOFR + 3-5% and fixed rate might be somewhere between Treasury + 2-4%. BIG emphasis on "might" there, as there really are a lot of variables. For reference, SOFR is somewhere around 4.6% and the 5 yr Treasury is somewhere around 4.3% these days. 

If you want to make your application more attractive to a commercial lender, you could:

1. Offer to amortize the loan on a schedule faster than 30 years. You could offer 25 or even 20 year amortization. The faster you pay down the principle, the less risk to the lender. 

2. Offer to fully amortize the loan. Commercial borrowers might borrow for 5 years on a 30 year Amortization (this is called a 5/30), so when the loan matures they still have lots of balance remaining. It's safer for the lender if you fully amortize with, say a 30/30 or a 25/25. 

3. Offer recourse even if they don't require it. You being personally liable for the loan helps lower their risk.

If you want to try to get better terms from the lender, you could request

1. An interest only period to lessen your payments initially. 

2. Lower leverage in exchange for a lower rate. When you borrow with lower leverage, the loan is considered safer and the lender can offer a lower spread relative to the Index. 

3. Releases or prepayment flexibility like I mentioned earlier.

Good luck!