Tiller Hill Capital has closed a $1,760,000 loan for the acquisition of a 43 unit multi-familyproperty in Porterville, CA. Financing challenges included significant deferred maintenance, tertiary market location and a tight timeline dictated by a 1031 exchange. Local lenders were offering only short-term fixed rate financing with rates over 5%. We arranged a 12-year fixed-rate, non-recourse loan with a interest in the low 4’s and closed in time to satisfy the 1031 exchange.
Securinga new loan to purchase or refinance owner-occupied commercial propertypresents unique benefits and challenges compared to investor commercial properties. An owner-occupied property is one where 50% of more the space is occupied by a business owned and operated by the owner of the building. Owner-occupied properties cover a range of business and property types, from office, retail, and warehouse properties to special use properties such as medical and dental offices, gas stations and auto repair shops, restaurants and hotels and motels.
The benefits of owner-occupied commercial loans include:
- Lower Interest Rates – In general, rates on owner-occupied properties are lower. That is because the loan is backed not just by the leases and the creditworthiness of the owner, but also by the creditworthiness of the owner’s business. Also, occupancy is more predictable, as the owner-occupied business is less likely to move to secure lower rents or a more favorable location or facility.
- Longer Fixed Rate Terms – Most investor loans are limited to rates fixed for 5, 7 or 10 year, with a 25 (occasionally 30) year amortization, due in 10 years. Owner-occupied commercial property loans are often available as 20 year fixed rates, with a 20 year amortization, due in 20 years, or 15 year fixed rates, with a 15 year amortization, due in 15 years. Locking in a low fixed rate of interest for 15 or 20 years with no need to refinance after 10 years provides borrowers with long-term certainty of monthly loan payment amounts and avoids transaction costs associated with refinancing.
- Access to SBA 7(a) and 504 Financing – SBA financing is only available on owner-occupied property and is a mixed blessing. The additional paperwork and underwriting steps are a hassle and there are SBA fees that add to the cost of financing. However, SBA financing allows for a higher loan-to-value financing – up to 90% – and mitigates certain credit challenges (i.e. late payments, past due property taxes, defaults) and property risks that would rule out conventional financing. For example, most lenders will only extend conventional financing on special-use properties and those with environmental risks – such as gas stations and auto repair facilities – if there is a low loan-to-value and excellant credit. A recent change in rules now allow SBA 504 fixed rate financing to be used for refinance of existing owner-occupied properties where previously only typically variable rate 7(a) loans were possible.
Owner-occupied commercial property loans are not without their challenges. These include:
- Business Must Guarantee the Loan – With an owner-occupied commercial property loan, the property owner’s business must guarantee the loan. The lender will underwrite not just the property and the owner, but also the owner’s business. This involves lender review of the operating results of the business including tax returns, interim financials (income statement and balance sheet) and business debt schedule. This means more paperwork and scrutiny which most borrowers would prefer to avoid. Issues may also arise if the ownership structure of the business is different from that of the property. For example, if the owner of the property has partners in the business who are not partners in the property.
- Rates Tied to Banking Relationship – The interest rate offered by lenders on owner-occupied commercial property loans are generally set according to the overall relationship with the borrow and the borrower’s business including their business and personal checking and savings accounts and, when applicable, other business loans and/or payment processing relationships. Often, borrowers are not happy about changing an existing business banking relationship in order to secure the lowest rate on the commercial property loan.
In summary, greater flexibility in loan terms and lower rates are available when financing owner-occupied commercial properties. However, this comes with added complexity in the underwriting process and may involve changes in other banking relationships to secure the best rates and terms. Working with knowledgeable professional and comparing quotes from multiple lenders is key to closing with the most favorable financing solution.
Most of my industry contacts say they are seeing a drop in new multifamily and commercial loan activity in recent months. To get a more defininative measure on what was happening I pulled the number of recorded loans for the three month period ending in January of 2017 and the three month period ending January of 2016 using a service I use to retrieve property records. I pulled the counts of loans recorded during those periods broken down by property type: commerical and commericial office, light industrial and heavy industrial, apartment. I included the nine counties of Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano and Sonoma.
What I found was that overall loan volume was down 13%, from 2,390 loans recorded in the three month period ending in January 2016 to 2,078 in January 2017. The biggest decline was in commercial and commericial office, where volume dropped 19.2% from 994 loans to 803 loans. The drop in apartment loans was less noticable, dropping 6.8% from 987 to 920. The drop in industrial was 13.2%, from 409 to 355.
ABA Banking Journal: Bankers continued tightening credit for commercial real estate loans and consumer loans in the last three months while holding steady on other business loans and easing credit standards very slightly in their home mortgage portfolios, according to the Federal Reserve’s latest senior loan officer survey released today. A net 33.3 percent said they tightened on CRE multifamily loans; 25 percent tightened on construction or land development loans. Demand for CRE loans was moderately weaker or about the same, respondents said. Continue reading…
Reuters: Loan officers at U.S. banks reported largely unchanged lending standards and slightly looser terms for business loans in the last three months of 2016, the Federal Reserve reported on Monday in a quarterly survey. Continue reading here.
Tiller Hill Capital has closed a $700,000 commercial real estate loan on a mixed use property in Redwood City, CA. The property is owner-occupied and includes retail space on the ground level and office space and an apartment upstairs. A new 5-year fixed rate loan with a 25 year amortization was arranged that retired existing first and second lien financing.
Commercial Observer – The commercial real estate financing market is facing numerous obstacles this year, ranging from the potential impact of newly implemented regulations to a likely shift in federal monetary policy to shifting solid fundamentals—and whether or not those changes will decrease demand for debt. There is also the rise of nontraditional, nonbank lenders in the marketplace to consider, as well as an incoming presidential administration that many believe will bring about policies beneficial to the overall economy but whose specific agenda remains notoriously hard to predict. Continue reading…
Since the election, most commercial lenders have raised their rates from .4 to .6%. This was in line with the increase in treasury yields, to which commercial real estate loans rates are closely related.
The Federal Reserve is signaling they may raise their benchmark rate before year-end due to strong unemployment and GNP numbers. This may not translate into a similar increase in commercial real estate loan rates, but in opinion of many, it makes it less likely rates will drop back down to pre-election levels.
We may be at the end of a period of exceptionally low rates on commercial real estate loans and entering a period of what are very low rates historically.
So back to question, “Refinance now or wait?” If refinancing will lower your monthly payment, and/or you have a variable rate loan, now remains a good time to refinance. If you are delaying refinancing, hoping that rates will drop back down to the exceptionally low levels seen over the last few years, you may be disappointed. I could be wrong, but that is my opinion and that of most bankers I speak with.
The U.S. dollar rally is likely to continue into the coming year on expectations that President-elect Donald Trump’s proposed reflationary economic policies will force the Federal Reserve to raise interest rates more quickly, according to a Reuters poll.
Most foreign exchange strategists also say risks to forecasts for the dollar to gain against every major currency are skewed to the upside. They see nearly one chance in three the euro will reach or fall below parity in the year ahead.
“(The dollar) continues to reign supreme on the back of bets of improving growth and the inflation outlook in the U.S. after Trump’s win,” said Valentin Marinov, head of G10 FX strategy at CA-CIB. “Investors continue to adjust their long-term rate hike expectations, anticipating a more aggressive monetary tightening cycle.”