What do the majority of commercial and industrial properties use for financing ?

Question

I’ve always wanted to know

Interest only ? Or conventional ?

Zachary Ware · Answer

When it comes to financing, the options vary based on the type of property:

Residential (1-4 units): Financing for residential properties typically includes conventional 30-year fixed debt or interest-only loans. Interest-only loans can provide greater cash flow in the early years, but the entire principal balance will need to be paid down later.

Smaller multifamily properties (up to 10 or 12 units): Financing options for these properties often include 30-year fixed debt or DSCR loans, which evaluate the property's income potential rather than focusing solely on personal income.

Larger multifamily properties: As properties grow in size, financing options shift towards banks or agencies specializing in multifamily loans. These loans often involve a balloon payment at the end of 5-10 years, requiring the principal balance to be paid in full.

It's important to keep in mind that options and terms may vary depending on factors such as property location, borrower qualifications, and market conditions. Working with a knowledgeable mortgage professional or loan officer is recommended to explore the most suitable financing options for your specific property and financial goals.

Jared Husmann · Answer

Commercial properties will generally always use some form of bank financing.  The biggest difference between residential and commercial is that a residential mortgage is sold off to the secondary market whereas a commercial mortgage will be held by the institution that made the loan (unless it is a CMBS product).

Commercial lending standards will lend on the lesser of two amounts, the Loan-to-Value (LTV) or Debt-Service-Coverage Ratio (DSCR).

Drew Wahlgren · Answer

Speaking from my experience in Industrial Real Estate :

-CMBS: Using full term I/O for a 10 year note is a favorite for many institutional investors.  The play is for maximum yield and assumes rent growth and asset appreciation over time.  Sometimes there is 12-24 months I/O followed by 30 year amortization. Leverage is typically 60-65%.  There are 5 year CMBS notes as well but they are a little less common.

-Full recourse notes from community banks, credit unions, regional banks:  With a solid guarantor behind the loan, a borrower can get up to 75% LTV, but that high leverage is less common this year as lenders are pulling back and getting more selective. 25 year amortization is common.  You can get much more flexible with reduced/eliminated prepayment penalties, so a 10 year note with a fixed rate is great if you can refi or sell after a couple years with no penalty.

-Life Insurance Lenders:  Great rates and terms, but they are very picky and typically want investment grade tenants and primary markets (read: low yield core investments).

MIchael McCUe · Answer

As a matter of fact that’s really cool is it the same with other business in finance like manufacturing and farming I’m gonna guess they pay some sort of depreciation ?

MIchael McCUe · Answer

thanks yall, I really appreciate the advice.

Brock Mogensen · Answer

Depends on size of deal and the lease in place. Longer term leases (10+ years) with a credit tenant will qualify you for non-recourse financing with IO.  Shorter term lease deals with non-credit tenants generally go to local bank financing with minimal IO.

Evan Polaski · Answer

@MIchael McCUe, it really could be anything and depends on deal size, risk profile and business plan of the asset.

There is

Mezzanine debt: I/O floating rate, shorter term, higher leverageLife Insurance debt: typically amortizing, long term fixed rate, low leverageBank debt (held on balance sheet): single or syndicated loan.  These can have I/O periods on floating or fixed rateCMBS: fixed rate, often amortizing, securitized into bonds, longer term

If, when you say commercial, you mean retail, office, hotels; effectively anything non-residential, the agencies are not lenders in that space.  If you mean commercial as in larger multifamily, then a lot of Fannie and Freddie loans and HUD for the very long term holds.

What do the majority of commercial and industrial properties use for financing ?

Most Popular Reply