Replying to the decelerating economy, decline in property values and current "credit crunch" even highly flexible, non-public "hard cash" commercial loan lenders have tightened their lending standards and adjusted their standards.
Cash
The most outstanding change, and the most painful to borrowers, has been to down-payment necessities. Virtually all licensed money lender , private and conventional, have stopped originating 100% financing. Cash-in-the game is at present a, nearly universal mandate.
10% hard equity (money down or money previously contributed) is what most commercial hard money people consider reasonable. Before they make a mortgage loan they need to know that that the borrower has made a genuine, financial undertaking to the building or development. Distressing experience has demonstrated that the less cash a speculator has put in, the more likely they are to walk away when the going gets troublesome.
Many banks will permit fairly big seller carried 2nds or mezzanine loans but total debt can't exceed 90% of the purchase price or total project costs. The hard money lender will demand that their mortgage be in the 1st position. For loans against quality commercial property, hard cash executives will usually lend up-to 50% of the value of land, 60% on empty buildings or buildings with insufficient money flow and 65% on income-generating commercial buildings such as multi-family, office or retail.
Experience
Today funding sources are concerned about the security of their capital. They prefer to make loans to experienced, approved execs. Now is not the time to ask a bank to finance your experiment. If you're buying a gas station it'll help if you have real world, on-the-job, automobile industry experience. If you've always had a dream to run a hotel but have no hospitality background, keep dreaming until money starts flowing.
My advice to those lacking relevant experience in any given arena of commercial real estate is to build a team or form a collaboration with seasoned pros in the area you need to break into. First time investors frighten loan officials. Team up, split the profits, get experience, make a big reputation for yourself and it won't be that long before banks are calling you.
Exit
Non-public loans are short-term loans, typically 6-36 month, rarely more. Hard money banks aren't lend-to-own banks; they do not want to take back your property. Before they close a contract with you they will need to know precisely how you're going to pay them back. The two most typical and plain exit systems are: refinance the property or sell the property.
If you intend to refinance at the end of the primary mortgage, you'll need to prove to the lender that both you and the property will be in a position to qualify when the time comes. It will not be sufficient to assert that you can cross that bridge when you come to it. Do your studies and show the hard cash mortgage source that you know what it'll take to refi and you may do what is required to refi. Your deal will rely upon it.
If your exit is a sell out of the collateral property, do market research, put together a marketing plan and a capable promoting team. Be pragmatic in your sales price projections take the emotion out of setting the sales price by getting an "as-completed" rating or a "Brokers Price Opinion" (BPO) done by a commercial specialist. Your marketing campaign should start right away and run across the whole project. Potential lenders want to know that you will work as hard paying off a loan as you may to qualify for a loan. A sound, well thought out exit plan is a total must, today more than ever.
Make no mistake about it; funding is more difficult to come by. Investment and loan standards have tightened up across the entire commercial real-estate finance industry. Accept the undeniable fact that lenders have stopped financing marginal bargains. Today, and for the near future, a deal will have to be exceptional in-order-to secure a mortgage.
Don't waste your time making an attempt to push a weak deal through, instead bring some money to the table, work with property types you have got good experience with and make sure you have a viable exit plan. That's the formula for getting funded instead of annoyed.
Cash
The most outstanding change, and the most painful to borrowers, has been to down-payment necessities. Virtually all licensed money lender , private and conventional, have stopped originating 100% financing. Cash-in-the game is at present a, nearly universal mandate.
10% hard equity (money down or money previously contributed) is what most commercial hard money people consider reasonable. Before they make a mortgage loan they need to know that that the borrower has made a genuine, financial undertaking to the building or development. Distressing experience has demonstrated that the less cash a speculator has put in, the more likely they are to walk away when the going gets troublesome.
Many banks will permit fairly big seller carried 2nds or mezzanine loans but total debt can't exceed 90% of the purchase price or total project costs. The hard money lender will demand that their mortgage be in the 1st position. For loans against quality commercial property, hard cash executives will usually lend up-to 50% of the value of land, 60% on empty buildings or buildings with insufficient money flow and 65% on income-generating commercial buildings such as multi-family, office or retail.
Experience
Today funding sources are concerned about the security of their capital. They prefer to make loans to experienced, approved execs. Now is not the time to ask a bank to finance your experiment. If you're buying a gas station it'll help if you have real world, on-the-job, automobile industry experience. If you've always had a dream to run a hotel but have no hospitality background, keep dreaming until money starts flowing.
My advice to those lacking relevant experience in any given arena of commercial real estate is to build a team or form a collaboration with seasoned pros in the area you need to break into. First time investors frighten loan officials. Team up, split the profits, get experience, make a big reputation for yourself and it won't be that long before banks are calling you.
Exit
Non-public loans are short-term loans, typically 6-36 month, rarely more. Hard money banks aren't lend-to-own banks; they do not want to take back your property. Before they close a contract with you they will need to know precisely how you're going to pay them back. The two most typical and plain exit systems are: refinance the property or sell the property.
If you intend to refinance at the end of the primary mortgage, you'll need to prove to the lender that both you and the property will be in a position to qualify when the time comes. It will not be sufficient to assert that you can cross that bridge when you come to it. Do your studies and show the hard cash mortgage source that you know what it'll take to refi and you may do what is required to refi. Your deal will rely upon it.
If your exit is a sell out of the collateral property, do market research, put together a marketing plan and a capable promoting team. Be pragmatic in your sales price projections take the emotion out of setting the sales price by getting an "as-completed" rating or a "Brokers Price Opinion" (BPO) done by a commercial specialist. Your marketing campaign should start right away and run across the whole project. Potential lenders want to know that you will work as hard paying off a loan as you may to qualify for a loan. A sound, well thought out exit plan is a total must, today more than ever.
Make no mistake about it; funding is more difficult to come by. Investment and loan standards have tightened up across the entire commercial real-estate finance industry. Accept the undeniable fact that lenders have stopped financing marginal bargains. Today, and for the near future, a deal will have to be exceptional in-order-to secure a mortgage.
Don't waste your time making an attempt to push a weak deal through, instead bring some money to the table, work with property types you have got good experience with and make sure you have a viable exit plan. That's the formula for getting funded instead of annoyed.
About the Author:
Robert Newton is a business writer specializing in finance and fast loans and has written prominent articles on the finance industry. He has done his masters in Business Administration and is currently aiding as a loan expert.
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