First commercial loan questions

[Quang L.]

I did plenty of residential investments and loans with online lenders. But doing first true commercial loan for a retail building (1.5M loan with 75LTV) can be a different experience due to different qualification process.
Questions:
1. who are best lenders? local banks or online lender? if local banks then can please give some name in Texas?
2. would 75LTV enough for them to isolate my other assets from this investment? can we put building under a LLC instead of our names?
3. what is best term if I plan to keep property in long period? what needs to be there to make note extension easier in the future.
Thanks in advance
QL

[Dion DePaoli]

"Best" lenders is going to be who ever you can get money from.

I think your LTV is a bit too high for retail right now. More than likely you are going to need to bump that up by 10%.

I don't know what you mean isolate other assets. Yes the asset can be vested in the name of an LLC.

For retail you are likely going to be seeing a 5 or 7 year balloon. Not sure you can get an easy extension, that sort of defeats the point of maturing the loan. The extension will be at the discretion of the lender and based on many things in the future.

It sounds like you are new to commercial so perhaps go speak to a small community local bank and see what their program is for retail commercial property. It will generally be easier to work with a local banker than a lender funded by a large investment fund and your loan is serviced by a commercial loan servicer.

[Bill Gulley]

I think you should shop the local banks as well. The LTV will depend on the strength of the property as well as you and partners if any, but if this is your first, you'll probably be looking at 60 to 70%. That's with your cash down, not other financing involved for a higher CLTV.

Face it, you'll be persoanlly kissing the note, while your other assets should not be involved, a personal guarantee means that everything can be on the line. If you occupy half or more of the building you might consider an SBA, they usually have a good track record of being renewed at maturity if there were no problems. There are no guarantees for renewals, you might ask about a longer term on an adjustable rate (there are no long term fixed rates at that loan amount that I know of as the lender needs a repricing opportunity).

Good luck.....

[Quang L.]

Thanks! Dion and Bill.
I look for offer that is 5-6% for 10 years balloon. One local bank that I checked only offfer to primary owner occupied property. My case is purely passive investment. So I will check with more local banks. I thought property spoke for itself with almost fully occupied with long term leases and DSCR would be >1.5. The property is strip retail that has multiple tenants which I think would be lower risks than single-tenant property.
Both of you expect that I have to down more than >25% to get it done. Any insights why lenders wouldn't like to finance this kind of properties?

[Darryl Dahlen]

I agree with Dion and Bill on the LTV. You should plan on contributing about 30-40% of the capital needed as well as personally guaranteeing the loan.

Strip malls aren't an asset class the lenders will be aggressive on. Even if it is stabilized, but especially so if there isn't a long-term anchor in place.

So, a lender is likely to mitigate its risk by offering a short-term loan with a low(er) LTV not only to hedge against vacancy rates, but declining values as well.

[Dion DePaoli]

Darryl Dahlen hit the concept spot on.

Commercial retail is not an asset class at the top of the list for banks on minimal risk. In the event they need to take the property back through foreclosure it can be pretty management and capital intensive if the borrower did a poor job. Low balance retail strip centers with no solid anchor tenant does come with some potential vacancy loss and rental rate loss when tenants turnover. Small and mid sized tenants in some markets are few and far between which also pushes on the risk.

Its not that the banks don't want to lend they just want to lend conservatively. Lower LTV's than say multifamily is just the bank hedging a little of their risk both about the property and likely a little of your experience. The banker should give you a little background on what they see when looking at other deals and what their concerns are. It is wise to head their same concerns as they are more active right now in the market than you.

DSCR sounds great. As an adverse example, we worked on a retail center with a high DSCR but one rent was also 2x market. Not saying yours is like that but to point out that commercial underwriting is hard to just box into a couple of concepts like LTV and DSCR. It all matters and it will all be looked at. Many things will effect the terms and us three are generalizing what those terms might look like. The terms will be a little different from bank to bank depending on who might want retail strip center exposure in their portfolio and who does not. Talk with a couple banks.

It sounds like you have a good property, you just need to find a good finance partner now. Good luck.