Traditional vs. Bridge Financing For My New Deal

[Nick Hakim]

Hey BP -

I'm in contract to purchase a mixed use property in Northern New Jersey and I have a question for all of you lending guru's out there. As is, I'm purchasing the property at a 6.5% cap, but upon lease up of the vacant commercial space (which is not in need of any repair, renovation or capex), the property will be operating at a stabilized 10.5% cap within a few months of purchase. Since the delta between the in place and stabilized cap rate is relatively significant, would you recommend seeking a bridge loan to finance the property until stabilization, and then seek conventional financing? Given that there is only one space to lease up, and I negotiated the ability to market the space during the contract period, do you think traditional lenders will give pushback if I seek traditional financing initially? 

Some facts:

Purchase Price: $1,030,000

Desired LTV: 65-70%

Cap Rate @ Purchase: 6.5%

DSCR @ Purchase (70%LTV): 1.53

Stabilized Cap: 10.5%

Stabilized DSCR: 2.69

Any thoughts would be appreciated.

Nick

[Ryan O'Mara]

You might find traditional financing or you might end up having a lot of your time wasted only to finally be told NO by the lender.  How quickly do you need to close?  

[Joe Hughis]

@Nick Hakim - I think you many need to clarify the size of the "one space to lease up".  What percentage of the property is vacant (sq footage wise)?  It seems that it could be quite significant to raise the 6.5% cap all the way to a pro forma 10.5% cap.  Also, would I be correct in presuming the other portion of the "mix" are residential units?

The basics you mentioned about the property seem good.  However, the vacancy factor may prevent you from obtaining conventional financing.  Moreover, depending on the residential to commercial ratios the mixed-Use property may not be to the liking of many conventional lenders.

Based on the info you provided, I would tend to believe you will likely need a private money bridge loan until the vacant portion can be filled with a quality tenant.  BTW, try to get a longer term lease.  Conventional underwriters don't like short term leases on commercial tenants.  

If you do try a conventional lender, your best bet will be one whom you have a significant depository relationship. Your bank will also likely want you to maintain your operating accounts with them for the life of the loan.  Money in the bank and operating monies could be ways for a conventional lender to get comfortable with their elevated perception of risk brought on by a non-stabilized property.  

[Lathea Morris]

@Nick Hakim What type of business is the commercial space fitted for? For example, is the space for a restaurant, retail, offices, this will make a difference regarding funding opportunities. In this scenario, you may find that private lenders can offer more options including longer terms and at a decent rate.

[Andrew Beauchemin]

Hi @Nick Hakim, putting myself in the shoes of the conventional lender, I'd want to see a solid track record of the stabilized operation before committing to a loan, at least 6-12 months.  Unless you have the cash or collateral to back the vacancy period, it may be difficult to get a good rate from a traditional lender on speculation alone.  

Shoot me an email if you'd like to discuss in more detail.

[Tim Milazzo]

Definitely the time for a bridge loan. If you can get traditional financing on the property now, you probably will regret it a year from now if you get a great commercial tenant, because you'll be stuck at a very low relative leverage point. I say "stuck" because your typical, traditional commercial mortgage will have a prepayment penalty if the rate is fixed, so refinancing isn't cheap or easy.

Close with an interest-only, no prepay bridge lender and then you'll have the time to lease up, and to refi, without stress.

[Joel Owens]

Commercial space there is attorney legal costs for negotiating a lease, tenant improvement credits, and leasing commissions to tenant rep brokers.

Also know if you approach credit type tenants they can take 6 months to 1 year or more to commit to a site depending on how larger they are.

Mom and pop tenants usually go in much faster but are not as stable and require more ongoing work.

[Nick Hakim]

@Joe Hughis thank you for the insight! You are correct - the property consists of two commercial spaces (retail and office), three residential units and 12 parking spaces. The ground floor retail space is occupied by a credit tenant which has been in the space since '94. The vacant office space accounts for approximately 33% of the GLA, so I agree that the current vacancy factor would deter most conventional lenders. Please shoot me a PM if this is something that you would be interested in lending on.

@Lathea Morris The retail space is fitted for food use, and is occupied by a credit tenant that pays 1/2 of the taxes for the entire building, plus 50% of any increase over the base year. The vacant space is technically office space, but could be used as a yoga studio, gym, event space, etc. Thank you for your insight!

@Andrew Beauchemin Thanks! I will shoot you a PM in the near future when we decide which direction we're going to take.

@Tim Milazzo It seems that way! I just took a look at your company, StackSource, and filled out an application. I'm very impressed with the usability of the site and would recommend anyone seeking financing to take a look. Let's be in touch.

@Joel Owens I have factored all leasing costs, capital improvements, and a hefty vacancy factor into my assumptions. Thank you for your thoughts!

[Dan Wallace]

If I am reading this post correctly, you have a sizable down payment (good LTV) and the property as-is generates a 1.53 DSCR. Why would you want or need to get bridge financing to stabilize this property? It would seem you are eligible for conventional financing without leasing up the vacant space and why pay for redundant fees/expenses that will come with taking out an unnecessary bridge loan and then refinancing at some point in the next 6 to 18 mos.

Go straight to conventional financing and then focus on leasing out the remainder of the property.