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Commercial Hard Money Loans – What Are They And Who Needs Them?

Commercial hard money loans are somewhat different from those for residential real estate.

What makes commercial hard money loans different from residential ones?

Let’s look at what makes commercial hard money loans different from residential ones:

  1. Commercial hard money loans are often larger than residential ones. They can go into the many-million-dollar range (100k – 100M+).
  2. Qualifying for these loans is different, too – cashflow and loan-to-value (LTV) are both “king” (more on that below)
  3. Rates can be aggressive – they depend on several factors such as loan amount, LTV, closing speed, etc.

Residential mortgages typically involve individual borrowers. In contrast, commercial real estate loans are most often given to business entities (e.g., corporations, developers, limited partnerships, funds, and trusts).

Examples of commercial properties

First things, first though. What types of properties are considered “commercial” and fall under commercial hard money loans?

Here are just some examples:

  • Land/lot
  • Apartments
  • Condominiums
  • Townhome complexes
  • Assisted living
  • Senior homes
  • Student housing
  • Mobile/manufactured home parks
  • Residential income/rental property
  • Residential subdivision
  • Mixed-use properties
  • Planned unit development (PUD)
  • Retail malls, shopping centers
  • Industrial incl. warehouses
  • Office buildings
  • Entertainment/ recreational facilities
  • Hospitality
  • Medical/Healthcare

There are just some of the many examples of commercial real estate types. What they all have in common is that they are income-producing. They create cashflow.

Commercial real estate loans have three purposes

Borrowers need commercial real estate loans for one of three purposes:

  • the purchase of the property,
  • for refinancing a property they already bought, or,
  • there are looking for a “second”, i.e., a loan in the second position.

How borrowers qualify for a conventional commercial real estate loan

Next, let’s look at how a borrower qualifies for a commercial real estate loan. Let’s start with conventional loans from a bank or conventional lender:

The way a borrower qualifies for a conventional commercial real estate loan from a bank involves many criteria:

  1. Is the property producing enough income to support the loan repayment?
  2. What is the purchase price/ loan amount versus the equity in the property?
  3. Credit history
  4. Excellent/ good credit
  5. 3-5 years of financial statements
  6. Lenders may have limitations on where the property may be located
  7. Borrowers must have a sufficiently long timeline to go through the loan qualifying and closing process

This process is often slow and involves a tedious amount of paperwork. What’s more, borrowers who have credit issues or no credit history don’t qualify. Business owners are a great example because they often have a hard time to sufficiently document their income.

How borrowers qualify for a hard money commercial real estate loan

Luckily, the process of qualifying and closing commercial hard money loans is much simpler and faster and overcomes these limitations:

As a commercial hard money lender, we don’t care about your creditworthiness and your income other than the income from the property you wish to purchase, refinance or put a second loan on.

The qualification for a commercial hard money loan is very straight forward and follows common-sense principles:

  • We are focused on the loan-to-value (LTV). For example, an LTV of 70% means the loan is 70% of the value of the property. This is the loan-to-value (LTV) criteria we also talk about when it comes to residential hard money loans (link another article).
  • The income of the property must pay for the debt service. Since hard money loans are frequently interest-only with a balloon payment at the end, a hard money loan often meets this requirement more easily than a loan where repayment of principal begins right away.
  • We can provide your appraisal as part of the loan which saves you easily around $3k or more, depending on the project.
  • We can give loans without a personal guarantee even if you don’t have the credit history or your credit is bad if the other factors work. The debt is a non-recourse loan, meaning that the lender has no recourse against anyone or anything other than the property.
  • The location of the property can be anywhere in the US and possibly other parts of the world.

A few more important facts about Loan-To-Value (LTV)

Since the loan-to-value is so important, here are few more facts that are good to know:

  • Loans with a lower LTV get better rates.
  • The higher the loan amount the more attractive the rate, for a given LTV.
  • A typical range of LTVs is 65-80%.
  • Banks/conventional lenders sometimes offer a higher LTV than a hard money lender, but they do require personal guarantees and qualification based on creditworthiness and documented income.
  • The maximum acceptable LTV depends on the category of what the loan is for.  For example, 65% may be a lot for raw land but 80% might be acceptable for multifamily construction.

How do I choose the best lender for my commercial hard money loans?

As you learned in this article, commercial hard money loans are different from residential hard money loans. Here are a few tips:

  1. You want to make sure to select a hard money lender who truly understands this space and can give you the best options to suit your needs.
  2. You want someone who can choose from a large spectrum of options to satisfy your needs optimally.
  3. Find out whether the hard money is reputable and offers educational programs to realtors in the commercial real estate space.

Ted Przybylek, the founder of RanchoTed, has been serving clients in the commercial and residential real estate space for 30 years. Contact us for more information and to discuss your specific project needs.

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