An Insiders’ Guide to Getting a Commercial Loan

Whether you plan on buying or refinancing a multifamily property, knowing some tips and tricks from someone inside the mortgage business is necessary to navigate our ever-changing lending environment successfully. I have been working in the commercial real estate lending industry for 15+ years as a mortgage broker and wanted to share some insights on how to strategically navigate your next CRE loan.  

These are the things to keep in mind when getting a loan:

Shop Around – The financial markets constantly change programs and rates, so it pays to shop around. One of the most efficient ways to find a new loan is through a mortgage broker like myself. We have relationships with over 200+ lenders between Banks, Credit Unions, Fannie, Freddie, HUD, etc. to ensure you are getting the best terms the market has to offer. If you don’t currently use a mortgage broker, please feel free to reach out for a complimentary consultation.

Get Organized – When it is time to get a loan, most lenders will want to see the following items at a minimum, so it is best to get organized ahead of time:
•    Three years income and expense statements for the property
•    Current Rent Roll
•    Leases
•    Personal Financial Statement
•    Schedule of Real Estate
•    Three years of personal tax returns
•    Organization docs for the entity that owns the property (LLC, Trust, etc.)
•    Insurance ACORD

Insurance – Insurance costs vary widely between companies. The easiest way to shop for insurance is through an insurance broker. They can shop several different carriers to determine who has the lowest premiums and the best coverage to keep you protected. If you don’t currently use an insurance broker, please feel free to reach out for a recommendation.

Vacancy – Most lenders will underwrite a vacancy rate higher than the actual market vacancy rate, or 5%. As a result, you should strive to end the year with around a 5% vacancy rate. This means your property’s rents are likely near the market, and you have a healthy level of turnover. If your property is always 100% occupied, this likely means your rents are below market. When it comes time to get a loan, the loan amount available could be less than if you were operating at market rents with occupancy of around 95%. 

Expense Tracking – When making capital improvements on your property (e.g., a new roof, new windows, renovating units, etc.), make sure to categorize these expenses as Capital Expenditures “below the line,” also known as below your Net Operating Income. If you include capital improvements in Repairs & Maintenance without itemizing them out, your expenses will show higher than needed, which will hurt the size of the loan and loan terms you can achieve.

Partners – If you plan to partner with others, remember that anyone with more than 20% ownership of the property or managing authority will have to be underwritten by a lender. This means the lender will want to do a deep dive into them to understand their financial picture and may require them to sign as a guarantor on the loan.

Terms – Loan terms vary widely between 1-year bridge loans and 30-year fully amortizing permanent loans. Understanding your desired goals for the property will help determine which loan term is best suited for your needs. Most permanent loans are typically structured with 5, 7, or 10-year terms, amortized over 30 years. This means after your 5, 7, or 10-year term, you will have a balloon payment and either need to refinance, sell, or pay off the balloon payment at the end of the loan term.

Recourse vs. Non-recourse – Understand the difference. Some lenders offer recourse loans, while others offer nonrecourse loans. A non-recourse loan is typically preferred, as this limits the lender's ability to pursue your personal assets in the rare event you have to give back the property. Recourse loans, on the other hand, allow the lender to pursue your personal assets if the property collateral is not sufficient to repay the lender. 

Prepayment Penalty – These can vary widely between lenders, so it is essential to work with an experienced mortgage professional to discuss the differences. Some lenders offer a simple step-down prepayment structure (4%, 3%, 2%, 1%, 0%), whereas others use a more complicated approach, such as yield maintenance or defeasance.  

Call to set up a consultation and discuss the next steps for refinancing your current property or finding a new loan for a future purchase. 

Robert Meunier, Senior Loan Officer at Bellevue Capital Group. C: (206) 849-9999 Email: rmeunier@bellevuecapitalgroup.com