“Considering a new commercial loan or refinancing your property?”
Newsletter
February 2025
“Considering a new commercial loan or refinancing your property?”
There are numerous current industry related articles that project a cautiously optimistic view of a revitalizing 2025 commercial real estate investment market. Conventional lenders as well as most national commercial brokerage firms, are optimistic, anticipating increased investment activity and increased profitability for the coming year. However, uncertain economic market conditions, persistent high interest rates, and over-valued asset pricing will continue to present significant challenges.
Many investors have adopted a ‘wait-and-see’ investment philosophy concerning commercial real estate investing. But for those investors that are currently actively engaged in the market or have an existing loan with expiring terms coming due, navigating through the ever-changing financing market can be a formidable challenge.
Sources of funding
Conventional Lenders
A conventional lender such as banks, credit unions, life insurance companies, private equity funds, mortgage REITs (Real Estate Investment Trusts), investment firms, and various portfolio lenders provides loans for property acquisitions, development, or refinancing without government backing or insurance. Lending decisions are heavily influenced by the borrower’s creditworthiness, financial strength, and the property’s performance. Terms can vary significantly based on the lender’s policies, often offering more customization than government-backed loans. Conventional loans typically require larger down payments (often 20-30% or more). Compared to government-backed loans, interest rates may be higher due to the absence of federal guarantees.
Government-based loans
Government-based loans for commercial real estate are a form of financing typically backed by a federal, state, or local government agency designed to support business owners, investors, or developers in acquiring, developing, or improving commercial properties. These loans often have more favorable terms than conventional lenders such as lower interest rates, longer amortization periods, and reduced down-payment requirements.
Some of the more common government-based loan program include the SBA 504 Loan Program designed for purchasing fixed assets like real estate or equipment. Offering long-term, fixed-rate financing with a typical structure of 50% conventional lender financing, 40% SBA-backed financing and 10% borrower equity. SBA 7(a) Loan Program is designed for real estate purchase, renovation, working capital, and debt refinancing. These government-based loans can provide up to $5 million with variable or fixed rates and repayment terms extending to 25 years for real estate. There are other forms of government-based loans such as the USDA Business & Industry (B&I) Loan Program intended to support for rural business, HUD/FHA 223(f) Loan Program to support multi-family housing, HUD/FHA(d)(4) Loan Program for multi-family new construction and the New Markets tax Credit (NMTC) Program to encourage investment in low-income communities through tax credit incentives.
Each of these government-backed funding programs have specific benefits and drawbacks for both borrowers and participating lenders. For lenders, government guarantees help to reduce lender’s exposure to default risk making is safer to extend credit to small businesses. These programs also enable lenders to serve a broader clientele, and they are often used to differentiate lenders in the market. Government-backed funding program can benefit borrowers by offering more competitive interest rates, extending loan amortization periods, require lower down-payments, they can offer more flexibility of fund usage and are often designed to encourage small business start-ups. The downside to borrowers’ participation in these programs however are that government approval processing can be lengthy. They also require ‘personal’ guarantees that extend far beyond the initial business asset being financed (note: never under-estimate this point!), strict eligibility criteria can mean lengthy and delayed loan closing schedules and government-backed programs require added fees and cost associated with these guarantees.
Non-Conventional Sources for Funding
A hard money lender is generally a private individual or company that offers short-term loans secured by real estate. Unlike traditional lender, hard money lenders normally focus on the value of the collateralized real estate rather than the creditworthiness of a borrower. The key benefits afforded by hard money lenders are fast approval and a reduced funding processing, flexible terms and loan structuring, and less emphasis on the borrower’s credit history.
Partnerships effectively pool resources, can function to help mitigate risk, and are often used to leverage diverse skill sets. Partnerships typically expand access to capital, help to broaden professional skills and extend industry networking.
Lease-to-Own contracting options are a widely under-utilized funding sources in today’s marketplace. This option could be better applied to help mitigate issues that are broadly prevalent in today’s investment market and could be structured to effectively help close gaps between a seller’s price expectations and their ‘currently’ under-performing assets. For example, a master lease could be structured to allow a tenant (buyer) to control an asset at a nominal cost (down-payment) while redeveloping the asset to a more productive use, after redevelopment and repositioning, that same asset could be used to collateralize a new loan that would justify a seller’s original asking price. While the property is being redeveloped, the seller would effectively still own the asset, until the tenant (buyer) satisfies their lease-to-own fee interest requirements.
Evaluating which funding source is the best fit for you and your investment property requires knowledge of the prevailing lending market and the prevailing commercial real estate market. Effective financing decisions require an in-depth review of the property itself, a clear understanding where the property is positioned within its local market, knowledge of what funding tools are available, and understanding of an owner’s/investor’s goals and expectations.
If you have an existing loan scheduled for restructuring or are considering funding for a new commercial investment project, it is not too soon to begin to align your expectations and your investment property with the reality of today’s marketplace.
If you have questions about your investment’s financing or have an issue in general with your commercial investment property that you would like to discuss, please call me for a free confidential consultation.
David M. Dornbos, MA, MBA
President
Capital Investor Services, Inc
(303) 550-0095
dave.cisinc@outlook.com
For more information about me or the services I provide please see my webpage at:
www.realestateassetadvisor.com
