Small Balance Commercial Loans: How Low can you go?

How low can you go? How low SHOULD you go??

So this buyer called me the other day

Buyer - I am interested in buying a 1000 square foot office/warehouse condo in Hollywood, Florida.  I was given your name by the listing agent who said you can help me.

Me - Great! That I can do!  Let me ask you, how much did you want to put down on that property?

Buyer - I don't want to spend any of my own money...

Me - oookkkk... well in residential lending, I can get you 100% plus closing costs, but commercial lenders require a minimum down payment.  The best programs are at 75-80% loan to value... but I can regularly get to 90% without much effort.

Buyer - that's $15,000!!

Me - plus closing costs...

Buyer - how much are those??

Me - well, it depends... the lender usually charges around 1 point (1%), an appraisal on that property will be around $2500, there will be title fees, state taxes, a developer fee of 2%, plus recording fees... and then there are my fees...

Buyer - NO... that's too much!

Me - well, just to be clear with you, commercial lending is similar to residential, but because the lender looks at things differently, it is more expensive.   A residential appraisal takes 48 hours and costs $400 -  a commercial appraisal takes a minimum of 2 weeks and costs at least $2000.  Because they're reviewing your business as a "tenant" the review process is more time consuming which makes it more expensive. 

I don't like to mention this but there is a lender with marginally reduced fees... and they only require 3-5% down. 

Buyer - well, what will that run me per month...

Me - that's the kicker - when you use a lender like that, the rate jumps from a high 7 to a low 11%

Buyer - WHAT?!

Me - yeah... that would make your monthly payment around $1400

Buyer - I'm only paying $760 now for Rent!

Me - well... then there's CAM and Insurance on that property...

Buyer - How much is that?

Me - $2/psf

Buyer - that's $2000/mo

Me - no... per year...

So after that the buyer was just a little more irate.... not because of me - but because he thought he could get into this with nothing down and have a low payment also.

Let me be clear... I WANT to get him what he wants... but it just doesn't always happen that way.

Commercial lending is not hard per se... it is just more complicated and complicatING

It is also more expensive... on the flip side, your business can write off that much more on taxes!

MY RECOMMENDATIONS:

Buyers:

• Call me before you put money down.  Know what you can afford and what different down payments will mean for you regarding your cash flows in the business, your personal cash flows and the rates and payments that will thereby be available
• Know your credit... if your credit shows some blemishes, we can figure a workaround better if we're not under the gun of a due diligence clause.
• Let ME refer an attorney.  You'll want to protect the property in an S Corp or LLC.  I know attorneys that do this stuff routinely so they know how to help you structure the property properly

Realtors:

• Commercial needs LONG escrows.  Give me a 60day window minimum.  I may not need it but if I do, you won't be scrambling.  It is mainly up to the appraiser and if they don't come back for 5-6 weeks, then we're already over 1/2 the due diligence.  You still want that window of opportunity to renegotiate if there's a sizeable difference in purchase price and appraised value
• Go ahead and sell documentation!  Stated is fine...I have No Doc commercial... but if your client has a CPA and files taxes, we can look at the documentation and try to get the BEST rate.  In residential, just credit can get you the best rates but not in commercial.  If you want the best rates 3yrs Business taxes, 2 yrs personal, current P&L, all bank statements!
• Talk about Down Payments... from personal and business accounts.  Sure - there are 3-5-10% down programs.  The SBA has 90% financing... but the problem is that the terms get ugly when you don't have 15% down.  Why would we put a small business that will be growing in 3-5 years on average into a 5-10 year prepayment if we don't have to?  Why would we have a 3 year lock out - meaning NO adjustments??  I'd rather they have the money to operate than not - but I like to try to get the best combination of rate and terms and that starts at 15% down.
• CALL AHEAD... I'll meet you at Starbucks and we can talk to your client TOGETHER.  I'll buy coffee!  We'll get things under control from the get go!

Commercial Lending is not rocket science... if we all work together we can have happy clients... and happy clients REFER THEIR NEIGHBORS.

I would actually like to see the stats on homebuyers referring friends/neighbors vs small businesses doing the same!  I bet commercial would win!