So I was driving to a client and heard on the radio a commercial that played out like a skit
- One guy was telling the other that he was expanding his business and needed a commercial loan.
- The second one told him he just refinanced his commercial office condo and it was great.
- Come to find out you can refinance or purchase a commercial property with just 3% Down!!
Well... ummmm... Yeah!
The commercial was great at luring in the unsuspecting small business type... but what it didn't say was WHO IS THE LENDER?! (which I believe is illegal)...they just said go to wubba wubba wubba just three percent dot com...
I applaud people for stepping up in this market where office and warehouse properties are so hot. With rates where they are, this is a great time for small businesses to stop paying rent and start building equity.
BUT... at what cost??
The Lender in Question is Silverhill Financial... part of the Bayview Financial Family. They are what is called SMALL BALANCE LENDERS.
What does that mean?
Well... they typically cover the smaller end of the spectrum for commercial lending.
You see... some banks won't touch anything under $1Million... some $500Thousand... but Silverhill goes down to $200Thousand!
Which Banks??
To be honest - your bank! Most big name retail banks are not too keen on lending to small businesses if they have any issue whatsoever from credit to being only open a few years
What's the hitch?
Well... for some there aren't any. I do have access to Silverhill Wholesale... so I can originate the loan for my clients.
The problem is that these Small Balance Commercial Lenders are more like Equity Lenders...they say Collateral Based Lending though. They're more interested in a reasonable credit score and the property than the individual...
What does that mean to small businesses?
Higher Rates... yes... Silverhill's Rates are notoriously high... not as high as their sister company Interbay though!
So why would you go there?
Ease... that's about all...if you really can't get your bank to do your loan, you go there...
But is that where I take my clients?
No...I have never used Silverhill... or Interbay... in fact I know a guy trying to leave Interbay and refinance... and Can't!
Why??
Because besides much higher rates, the kicker in these loans is that they have very long prepayment penalties and sometimes Interest Guarantees!
Prepayment Penalty: This is what you must pay if you decide to sell, refinance or pay off the loan balance before a specific time. In commercial, this can be from 3 to 10 years!
- If 3 years, it is usually 5% in the first year, 3% in the second and 1% in the third.
- 5 years is usually 5%, 4%, 3%, 2%, 1% or sometimes 5-5-3-3-1
- 7 years is 5-5-3-3-3-1-1
- 10 years is either 5-5-5-4-4-4-3-3-3-1 or sometimes 10-9-8-7-6-5-4-3-2-1... and I was quoted one that was 10year 5% flat for the whole time!
Interest Guarantees: This is when the lender requires a certain amount of repayment regardless of the term of the loan... Interbay has this nasty habit of a 48 month interest guarantee... so if you sell in year 2, you still owe 24 months of interest PLUS your prepayment penalty
So... what do I do instead?
Simply put - make relationships.
I know ... vague... but my techniques are the thing that differentiate me from anyone else. I'll just say this. I have a list of over 100 commercial lenders - a lot of them are local. I earn my fees by knowing which banks are most likely to fund each borrower and property. I then get the loan packaged properly for that lender and Voila!
It isn't THAT easy... and it is something I have spent considerable time putting together as a business plan.
But what would I tell you?
Commercial Property IS about leverage... but only so far as the business can and should support it. I can't think of a business out there that would benefit from 97% loan to value... in fact I think 80-85% is where the sweet spot is for owner occupied properties.
I would suggest that there are all sorts of techniques to come up with the extra monies above and beyond the 3% that will strain your finances and your business a lot less in the short and long term than putting down only 3%.
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