Comm'l Office Bldg Under Contract-Too small for nonrecourse loan?

Question

I have a commercial office building under contract. It is in downtown of my home town. It is a shell and will require a remodel. Our downtown is a thriving and growing place. I am partnering with a long time friend and contractor and our Architect firm to purchase the property. All 3 of us currently rent office space in downtown of which we would office in this building. The building is 2 stories with about 6500 gross sf. We would occupy about 75% of the building. We will identify the tenants for the remaining 25% in our feasibility period (90 days). Here are the numbers:

Purchase: $250,000

Soft Costs, Construction, Contingency & Holding Cost: $475,000

All in cost: $725,000

Equity: $181,250 (25%)

Loan: $543,750 (75%)

Returns:

Lease Type	NNN	Full Service
Cash Requirement	$181,250	181,250
CAP	10.8%	10.6%
Cash on Cash Returns	20.8%	20.0%
ROI	29.6%	28.9%

I attached the operating numbers/assumptions if you want more detail as well as a potential layout (or at least I think I did).

Question: What are my loan options?

Because it is construction will it have to go through a portfolio lender? Is it too small for a non-recource commercial loan? Is there a non-recourse type loan available for for construction or only stabilized? Does it have to season for a certain amount of time before it can be taken out by a commercial mortgage loan? If so, typically how long? I would almost rather poke my eyes out than have to go through an SBA loan, but is this a candidate for that type of loan?

Thanks

Joel Owens · Answer

Most of my clients prefer non-recourse but these are high net worth (millions) to ultra high net worth ( over 25 million ) individuals.It's not about being confident in the purchase or not. It's about not being on the hook for a ton of debt.If you get a local recourse loan and a 4 million property goes from making 10k a month to losing 10k a month the bank will say " Tough you are worth so many millions pay it or we are coming after you ." The bank will not want to work out the loan.If it's non-recourse from a non-bank lender then as long as you are not violating any carve outs their option is to do a workout on the loan to get performing again or foreclose and take the property back. Doesn't matter if you are worth 20 million they can't come after you unless carve outs are violated.Now a non-recourse lender generally imposes a lock box account with cash sweeps. The lender will hold hefty reserves before pushing cash flow to your designated bank account. Since they only have the property to fall back on they are more picky on location,quality,and reserves held. Non-recourse loans are generally more expensive to originate because of additional legal costs.So for example if someone has 20 million in 5 properties and puts down 1 million ( 25% down ) on each one. 10 year loan and 5 years into the loan one of the properties is becoming a real dog. The owner still has 400,000 into the original 1 million put down. In some cases it might make more sense to just take the loss and regenerate the 400,000 back through other investments then keep feeding millions in debt on a property that has lost value with a very long time to recover.Some banks will do non-recourse but generally not at the 25% level but 45 to 50% down which kills your returns. I have seen some that will match a CMBS loan 25% down but they want the buyer to hold additional millions in their wealth management department for products that throw off 3 to 4% annually. It's not worth it to trap that additional money into crappy bank products with low yields.The smaller loans mentioned here it will mainly be local banks interested in that. The properties I work on I have to pull favors to get a lender to do a 2 million loan after down payment. As the markets have recovered some have a 5 million loan minimum now. Retail I do not see anything below 2 million for non-banks. Multifamily I see down to 1 million.I am sure there are exceptions if you dig long enough but I do not work on sub 1 million properties for clients. The quality of the property, the location, and the best financing tends to not be there.

Ned Carey · Answer

@Katie Neason Just FYI many times when I answer a question, I am answering it not just for the benefit of the asker but also the hundreds reading along that might not have the same experience as the original poster. Just the fact that you know what a non recourse loan is, says you are more experienced than many readers here.

Katie Neason · Answer

@Ned Carey Oh Ned...Great answer. As a former commercial banker (business loans/working lines of credit; not r/e) I have given that spill many times. However if no one should ever want a non-recoure loan because a non recourse loan means you think it is going to fail...why have them? I realize the answer to any question asked is ultimately go ask the people you want the information from, but that premise would make asking questions on here kind of useless. Just gathering my different options so I know who to ask what. It does't have to be non-recourse. It could be an SBA a loan...180 degrees from non-recourse. I am just am floating the balloon on options to see if something comes back that I haven't considered. You know, using the folks on the forum as a resource...Clearly at the end of the day to get a loan, I'll have to talk to a banker and/or mortgage broker...thanks for the advice.

Joel Owens · Answer

SBA loans were nightmares a few years back. I have heard they have gotten better to process and qualify for since the economy has been improving the last few years.

Dan Wallace · Answer

I finance these types of projects and from my perspective I do think this transaction is too small and the LTV is not strong enough for a non-recourse loan especially with a construction component.One of the strengths is that you will be occupying a majority of the space so the project will be considered owner-occupied. Is you business an existing business or a start-up? If you are an existing business then financing should not be very difficult. As for not wanting to secure an SBA loan, I am not sure of your prior experience with SBA lending but I have financed several similar projects through the SBA programs and the process is not complicated at all. As a matter of fact the SBA program recently had a record year.Best of luck!Dan

Account Closed · Answer

The loans I seen less than $3,000,000 are typically recourse.

Ned Carey · Answer

Why is non recourse important to you? If you are not confident of the deal you shouldn't be doing it anyway. Sure non-recourse is nice, but you shouldn't be doing deals just because you can and there is recourse.If it is truly a good deal recourse should not scare you.Many of your questions are lender specific. You need to go out and shake some hands and learn what specific lender criteria are. Not long ago when I asked lenders what their sweet spot was many said owner occupied commercial. They viewed that as the lowest risk on the commercial side.

Mark Creason · Answer

Katie,Typically, owner occupied properties are not eligible for non-recourse. I would suggest a local Texas bank for this loan.Mark