Getting First Commercial Loan

[Account Closed]

I'm considering jumping into my first 4+ unit commercial deal. Being that I've only done residential (4 units or less) properties, I'm a little wary of the process b/c I'm a new to the game and I'm looking for basic step-by-step process of what I should expect and what I'll need to get the ball rolling.

I did a forum search and found a few dozen posts, of which I read most, but curious if a few of the experts can distill this wisdom down a few key bullet points. 

Such as... 

1. Setup LLC
2. Contact commercial lender
3. Assemble numbers and documents
4. etc., etc., etc. 

Thanks in advance. 

[David Monroe]

Despite what most "Gurus" will tell you smaller commercial properties will require you to guarantee the loan and not just look a the property performance. If you have a partnership, they will look at all parties for security. For properties more than 20 years old it will be very tough to get a 25 to 30 year amortization. Due to the age of the property they typically will only do 15-20 years and sometimes will expect a a 5, 7, or 10 year balloon. You can expect a 75% loan to value or 1.2 debt service coverage ratio, whichever is less and this depends on your experience and creditworthiness. The Interest rate will also be tied to experience and creditworthiness.

The lender will want to see last 3 years of property performance in the form of profit and loss statements or Schedule C tax returns if the sellers are an entity or Schedule E if they're an individual. They will ask for a current rent roll and will want to see all the leases. They will also want the last 3 years of tax returns from you and your partners. If the property is valued less than $5,000,000 then you can expect the loan to be recourse. Non recourse loans are typically reserved for properties over $5MM in value.

They will want to see an executive summary that explains how you will acquire, operate and eventually sell the property. This should also include a financial cash flow analysis for the period you expect to hold the property. They will want the Articles of Organization if you're going to create an LLC and they will want to know if you're going to use a professional property management company.

The lender is going to ask for a survey, title insurance and a termite report with at least a one year bond. If the property is older than 1978 they will require a lead based paint disclosure. If the property is in a coastal county or in tornado alley, they will require a wind binder on your insurance policy and if your in an earthquake zone they will require an earthquake binder.

You will want to target community banks. Credit unions typically will not lend to commercial properties. Depending on your strength as borrower and the strength of the property and your executive summary try and negotiate a good rate, less than 5% and not pay any points. Lenders will compete for your business.

David Monroe