Small Balance Commercial Financing: Where To start

Whether you are highly experienced in commercial real estate or not, financing your acquisition or refinance can still be a great challenge. Loan programs are constantly changing, rates ever in flux, and new lenders are consistently entering and exiting the commercial finance space. Who should I contact? How do I know if my loan terms are reasonable? How do I even know which lender type makes sense for my situation?

​There are many more questions like those that have plagued commercial real estate investors for decades. Many investors have been so dissuaded by their efforts to obtain small balance commercial financing with traditional or specialty assets that when they discover a lender willing and able to lend on a particular transaction, they assume that lender is their best, or only, option for all future commercial related transactions. This couldn’t be farther from the truth as the commercial lending world is far more dynamic than a one-size-fits-all approach.

First, if you have already identified a specific property you would like to acquire or refinance, you should already know the following variables: property type, location, net operating income (NOI), rent roll/tenant mix (occupancy history, tenant(s) credit worthiness, lease expirations, etc…), rough estimated value, and the borrower’s financial/credit status. With these variables identified, you can help narrow down which lenders will even consider extending a loan. Commercial finance is much different than residential finance in that, a lender’s willingness to lend on an acquisition or refinance is based more on the asset’s long-term credit worthiness than the borrower’s personal credit worthiness. Residentially speaking, the available rate, term, and loan amount for nearly all residential loans are primarily based on the borrower’s personal qualifications and an appraisal of value thereof.

For Commercial financing, however, the answer isn’t that simple. A good personal credit score, high net worth, and strong personal financials, though typically required, aren’t usually the primary driving force behind a commercial lender’s ultimate credit decision. Commercial underwriters primarily base their lending decisions on the collateral’s viability as a long-term, income-producing asset to satisfy their internal risk tolerances, market fluctuations, and minimum debt service requirements. Most commercial lenders will not even consider lending on a given property unless it is a specific property type, located in their territory, within a certain loan amount range, minimum occupancy rate, acceptable tenant mix and condition. Additionally, the borrower will usually need good credit; a net worth equal to or greater than the new loan, 6-12 month cash reserves, commercial experience, and strong income from sources other than the subject property. I always find it amusing that many commercial lenders require the borrower to have previous commercial ownership experience before extending a loan, making it quite the conundrum for a first-time commercial investor. Best way to satisfy this requirement is to partner-up on your first few deals with someone who has experience.

After narrowing down your potential lender types, such as national banks, local banks, credit unions, life insurance lenders, CMBS, portfolio, bond, private lenders, etc., you will need to evaluate what’s most important to you as the borrower: loan-to-value (LTV), interest rate, fixed term, amortization period, non-recourse vs. partial recourse vs. full recourse (for potential future deficiency), pre-payment penalty, assumability, min/max debt service coverage ratio (DSCR), etc.

All of these terms will vary greatly based on personal preferences and market availability. Use the table below as an initial guide, but ultimately, looking for a lender without a game plan in place and without knowing key variables to your acquisition or refinance can be futile. It’s important to prepare yourself before investing time and money into a commercial venture by at least knowing which lenders have available capital for your deal and at what general rates and terms.

Commercial mortgage brokers generally have a much stronger pulse on available lending options than anyone else. Non-exclusive retention agreements are very common in commercial finance and give the borrower the opportunity to review multiple loan options without committing to any specific lender or mortgage broker until final loan commitment.

Happy hunting.

​This article was featured in the Arizona Journal of Real Estate & Business, October issue.