Financing for Recently Rehabbed Commercial Properties?

Question

I've been looking at some fairly cheap smaller commercial properties (6 - 12 units) which have been recently rehabbed (less than 3 months ago) and are now currently fully occupied in the Chicago area. They look like substantial values given the current rents and projected expenses, but I can't find any lenders that will lend on these commercial properties because most want to see 12 - 24 months of actual income and expenses for them.

Does anyone know of any lenders that will finance these types of transactions (ideally at 70-75 LTV)? I've tried both local and national banks but haven't had any success.

Joel Owens · Answer

What was the occupancy level before rehabbed and stabilized??

If it was really low or non-existent you can forget about it.

I talk to bankers a few times a week in the special assets divisions.I know what lenders are looking for when underwriting loans.Especially when they are lending at great rates. Lenders want to see AT LEAST 12 months of fixed percentage occupancy to base their lending on.

Historically if occupancy over a year treaded downward or occupancy stayed up but rents started declining is cause for concern.Also the turnover ratio even with high occupancy is key.

A big mistake I see by investors is they want to rehab a property in commercial and lease up and then IMMEDIATELY sell and cash out.It's not going to happen unless they partial owner finance with some down or the new buyer can assume the loan etc.

I tell these rehabbers when they call me to sell that they leased up to 50% occupancy 3 months ago and now are at 80%.They want me to list based on a sales price of 90% occupancy because they believe they will be there in the next month.

I tell them they need to be at that 90% at least for 6 months and preferably a year before a buyer will get a conventional loan with a great rate.

If the rehabber needs their funds to pursue other deals then they need to owner finance  with some down. They are probably using a hard money lender though.

If you are buying a 100% stabilized property and not a value add deal there are plenty who have been at 100% for years where you can still add future value and lending will be easier to obtain.

Matthew Hammond · Answer

I appreciate all of the info and apologize for the delayed response - I've been traveling overseas. The rehabber used some first month's rent discounts to get the property to full occupancy over 3 months. It's only 8 units and they are all 2s and 3s so it wasn't too difficult for him. The gross rent at the current leased amounts is $82k per year, projected expenses are $35k ($4.3k per door which includes a concession for vacancy), asking price is $300k. However as you all pointed out the lack of history is a big problem. I have good credit and two other 4plexes, 1 SFR, and 1 condo that I have all rented out so I have some experience, and I would be fine PG'ing the loan... but even with that I don't know where exactly I'd be able to find a lender that would underwrite the deal. If you know of any lenders who would potentially fund this, please shoot me a PM or e-mail.

Chester Mcleod · Answer

Matthew,

You're getting some good info here.  Our focus is generally smaller multi-families - under 50 units and there are a number of ways for you to take control of the property.  As a beginner, you may want to consider owner financing or going for a master lease (or lease option).  If you go that route it could give you the cash flow history that most lenders will require and allow you to get a conventional loan in the future when you refi or exercise your option.  You could also consider taking on an experienced rei partner who would have access to bank money or even his/her own to invest.  MParker has a valid point - if the cash flow at the lower occupancy was enough to cover the payments, then showing the 12-24 months income/expenses shouldn't be a problem with the right lender.  *IF* that were the case, the stability of the property would play less of a factor.  Our lender does that type of deal regularly but they don't work with new investors.  There are other ways that you could creatively finance the property, but if you are just starting out, I would suggest that you find an experienced commercial investor to partner with on this - even if they just coached you through the deal.  The experience and education that you could get from a seasoned pro would put you in a good position for future properties.

Darryl Dahlen · Answer

While lenders sometimes have differing underwriting requirements, all conventional lenders, and most hard money lenders, require the property to service the debt.

Being the OP stated the properties he's considering are fully occupied, the debt service requirement "should" be a non-issue. If it is an issue at 70-75% LTV then he shouldn't really be looking at the property at all.

Since these are smaller properties, any lender is almost certainly going to require the loan be full-recourse, so his credit, assets, and income are relevant. Hence, why I asked.

Also, the purchase price is going to set the LTV, not the appraised value. As long as the appraisal comes in higher than the PP that's all the really matters.

Mary Parker · Answer

You didn't mention what the NOI numbers were at the various occupancy rates, or the appraised value of the property. It's possible that the cash flow would service the debt even at the low occupancy levels. Different lenders have different requirements. Some lenders are more interested in cash flow than personal credit, there are solutions it just depends on each individual deal.  We've seen deals like this go through because the cash flow was enough to service the debt, but those situations tend to have experienced players in the mix. This forum has a lot of useful information so keep asking good questions.

Darryl Dahlen · Answer

Joel was nice enough to take the time to explain the driving force why you aren't any luck.

As far as financing goes I think you've gotten a clear picture from all the turn downs that conventional financing is a long shot at best.

If your credit, assets, experience, etc. are all above board you may want to try the hard money route until the financials season enough for you to obtain conventional financing.

If hard money is something you would entertain, and you don't have any additional collateral to pledge, you will more than likely have to come up with more money. Still, I think if you are set on acquiring one of these rehabbed properties you have to become open to non-conventional lenders.

Darryl Dahlen · Answer

How does one fully occupy 6-12 units in less than 3 months? Were incentives used?

The lack of historical financials is going to be a tough obstacle to overcome. Do you have any collateral to pledge? How does your credit and personal income look?

Financing for Recently Rehabbed Commercial Properties?

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