What Are Commercial Mortgage Rates Today?
Commercial Mortgage Rates:
If you just want to see where commercial mortgage rates stand right now, this Table of Current Commercial Mortgage Rates should be exactly what you need. However, you may be researching commercial mortgage rates because you actually need a commercial real estate loan right now. If so, the following article will be invaluable to you.
What Can I Expect When Applying for a Commercial Real Estate Loan?
The commercial real estate loan process typically starts with a phone interview with your loan officer. He will ask questions like:
- How large of a commercial real estate loan are you seeking? Each commercial lender has its own sweet spot - a loan size range into which the loan must fall. Here is a rule that will serve you well: "Take small commercial loans to small banks. Take large commercial loans to large banks."
- What type of commercial loan are you seeking? Do you need a permanent loan (a fancy term for a garden-variety, long-term first mortgage on a commercial property)? Do you need a takeout loan? A takeout loan is just a permanent loan that pays off a construction loan. Do you need a construction loan? If so, how much do you owe on the land? Ideally a construction loan borrower brings his land to his construction lender free and clear. Ideally... but don't panic. Do you need a bridge loan? A bridge loan is a fast, somewhat expensive, commercial real estate loan that allows the property owner to solve some problem. Perhaps the commercial property is all or partially vacant. Perhaps the property needs to be renovated. When the problem is solved, the bridge loan is typically paid off by a refinance or a sale of the property. Do you need an SBA loan? SBA loans are defined as commercial loans made to small business owners by banks and specialized finance companies that are partially guaranteed by the Federal government. The advantage of SBA loans is that SBA lenders will frequently finance up to 90% loan-to-value. Do you need a USDA Business and Industries Loan? USDA Business and Industries Loans are very similar to SBA loans, except that they are only made in lowly-populated rural areas. The idea is to bring industrial jobs to poor rural areas.
- What type of commercial property are you trying to finance? Is it multi-family? Is it an office building? Etc.
- Where is the property located? Most commercial lenders will only lend within 50 miles of one of their branches. When looking for a commercial real estate loan, you should apply to the lenders located close to the property. How do you find these local lenders? Go to Yahoo Maps and plot the address of the property that you are trying to finance. Then ask the system to plot the nearby banks. Easy-peasy.
- How is your credit? If your credit score is less than 680, you will probably not qualify for a commercial loan from a bank. Your best bet is probably to apply to a private money / hard money lender. You might also try a local credit union. A credit union? Really? Yup. Its a new market for them. Many credit unions are hungry to make commercial real estate loans these days, as long as the commercial property is located nearby.
Assuming your commercial real estate loan is a fit for the lender, your commercial loan officer will then ask for a loan package.
What Do I Include in my Commercial Loan Package?
A commercial real estate loan package should include the following:
- Color photo(s)
- Schedule of Income (for the subject property). If the property is an apartment building, a Rent Roll is what you need. If the property has multiple commercial units, like a strip center or a multi-tenant office building, you will want to use a Schedule of Leases. If the property only has one or tenants, you might just want to substitute both leases instead of a Schedule of Leases. The lender just needs something to determine the gross rental income being generated by the property.
- Last calendar year's Actual Operating Expenses. You can get these numbers from your Schedule E - Rental and Royalty Income off last's year's tax returns. Obviously do NOT include depreciation or mortgage interest. If you ran any household expenses through your property, you'll want to back these out as well. One cool thing about applying for a commercial real estate loan is that you get to use your Current Scheduled Rents (which includes any recent rent increases) and last year's actual expenses.
- A Personal Financial Statement, which includes both a Balance Sheet - a statement of your assets, liabilties, and net worth - and an Income Statement - which shows your annual income from salaries, profit from your company, interest, dividends, and net rental income.
- Two years personal tax returns, the two most recent years that you have completed. You have to submit two years' worth, not just one. If you have not completed your 2015 tax returns, you still have to supply your 2014 and 2013 tax returns. If the last tax return you completed was for 1989, please include your tax returns for 1989 and 1988.
- What about a Financial Statement, Operating Agreement, and two years' tax returns on your LLC that owns the property? Naw. Not at this point. If the loan passes muster, your loan officer will eventually ask for it; but don't worry about it at this stage. These documents are just file fillers, not substantive.
Your commercial loan officer will then prepare on his own a Pro Forma Operating Statement - a projection of next year's income and expenses, including a 5% Reserve for Vacancy and Collection Loss, a property management fee (even if the property is owner-managed), and a Reserve for Replacements (a sinking fund to pay for a new roof, a new HVAC system, repaving the parking lot, etc.).
Using the Pro Forma Operating Statement, your commercial loan officer will size the loan - compute how much the bank will lend. He will call you and say something like, "The bank would be interested in loaning you $2.1 million. Our commercial mortgage rate will be, say, 4.25% fixed, 25 years amortized, and due in 10 years (such longer-term bank loans typically readjust to market once at the beginning of year 6). If you want to move further, I'll send you a Term Sheet."
What is a Term Sheet?
A Term Sheet is defined as an expression of interest, by a bona fide commercial lender, in making a commercial real estate loan and a good faith estimate of the eventual terms. Legally a Term Sheet is worthless; but in practice commercial lenders rarely issue Term Sheets unless they are seriously interested in making the loan. When a bank issues a term Sheet, it means that are you are probably going to get the loan, as long as the property passes the third party reports. A Term Sheet is typically a letter on the bank's stationary, and it looks like a Commitment Letter (modernly Commitment Letters are as rare as a unicorn.) Term Sheets are sometimes called Loan Proposals, Good Faith Letters, or Conditional Commitment Letters. They all mean the same thing.
If a Term Sheet is not a legally binding document, why do lenders even bother with them? Answer: Commercial real estate appraisals can be very expensive. A borrower can easily pay $1,000 to $6,000 for an appraisal to obtain a commercial real estate loan. Toxic reports typically run another $1,000 to $3,500. Then there are title commitments, and sometimes (not often) even structural engineering reports. Collectively these reports are called third party reports.
To make matters worse, there is no guarantee that the lender is even going to approve the loan. Yikes! You can easily see a borrower saying, "I will only pay for the third party reports once the deal is approved." But the lender would only respond, "I can't approve the deal until I get the results of the third party reports." It's a Catch-22 situation. The borrower and the lender would be at an impasse. So how do lenders and borrower bridge this gap? It is customary in commercial mortgage finance for the lender to first issue a Term Sheet before asking the borrower to pay for any third party reports.
When the borrower signs the Term Sheet, he will return it with his check for third party reports.
How Much Will I Have To Pay For Third Party Reports?
It all depends on the loan amount and the type of property. Multi-family appraisals are usually 30% cheaper than commercial property appraisals. Typically the third party reports for small commercial loans (less than $1.5 million) total less than $2,500 to $3,500. The third party reports for larger commercial loans can run as high as $5,000; but they usually cost less. If you are getting a commercial loan of over $5 million from a life insurance company or a conduit, however, your third party report fees and attorney's fee can run as high as $20,000 to $25,000. This is the Big Boys League.
But If I Pass the Third Party Reports, I'll Get the Loan, Right?
If you are dealing with a bona fide commercial lender, like a commercial bank, and you are not dealing with an advance fee scammer, then yes, you will almost certainly get the loan. During my 35 years in commercial real estate finance, I have never seen a bona fide commercial lender repeatedly issue Term Sheets willy-nilly. Issuing a Term Sheet is a lot of work for a commercial lender.
But you need to be warned about advance fee scammers. Advance fee scammers are criminals - often of Eastern European origins - who set up fake commercial lending companies. Be careful. Although these guys are white collar criminals, some of them surround themselves with "muscle." They will create a nice web site, and they will make up expensive stationary. Then they will advertise for commercial loans. When the borrowers call, these con men quote commercial mortgage rates that are lower than the market. When they get the borrower's loan package, they quickly (everyone qualifies for their loans) issue Term Sheets that call for a $10,000 to $20,000 deposit for the third party reports. Then these criminals never order the third party reports. They never intended to make you a loan. They don't even have any money to lend. It's all a big scam. They pocket the borrower's third party report money and stop returning his phone calls. The furious borrowers often file police reports, but the police almost never prosecute.
Holy mackeral! They get away with it? Yup. The moral of the story is to make sure your commercial lender is bona fide before sending in your deposit for the third party reports. How can you tell if a commercial lender is legitimate? I once wrote a blog article about advance fee scammers.
Who Is Making Commercial Real Estate Loans Right Now?
The commercial lending institutions listed below are listed in a best-to-worst order in terms of commercial mortgage rates:
- Life Insurance Companies (83)
- Conduits (+/- 75)
- Commercial Banks (5,309)
- Credit Unions (7,165)
- Non-Prime Commercial Lenders (12)
- Private Money / Hard Money Commercial Lenders (+/- 400)
In other words, a life insurance company will have lower commercial mortgage rates than a conduit. A credit union will have lower commercial mortgage rates than a non-prime commercial lender.
Life Insurance Companies Make Commercial Real Estate Loans?
Yes, but as mere mortals, you and I will probably never qualify. Life insurance companies are known in the industry as life companies, and they offer the lowest commercial mortgage rates by far. Unfortunately their minimum commercial loan amount is $5 million, and the property must usually be either an office building, a shopping center, or an industrial center. In addition, the property has to be located in the most affluent area of a successful gateway city. What is a gateway city? To raise the bar even higher, few life companies will lend higher than 58% loan-to-value ratio. Like I said, few mortals ever qualify for a commercial loan from a life company.
What is a Conduit?
The word, "conduit", is short for real estate mortgage investment conduit (REMIC). A conduit is defined as a specialized mortgage company that originates large commercial real estate loans destined for securitization. These conduit loans are usually larger than $4 million, and they are secured by the four major food groups - apartment buildings, office buildings, retail centers, and industrial buildings. Although their commercial mortgage rates are often 0.75% higher than life companies, conduits will normally make larger loans in terms of loan-to-value ratio. The properties do not need to be gorgeous, and the area can be more middle-income. We call these average areas secondary locations.
What is a Non-Prime Commercial Lender?
A non-prime commercial loan is defined as a commercial loan offering (1) a long term, (2) a fixed rate which is higher than a bank but lower than a traditional hard money lender, and (3) a very large prepayment penalty. Non-prime commercial loans are written by a small handful of specialized finance companies, who eventually sell these slightly-flawed commercial loans to a trust, where the loan are eventually securitized. These commercial loans are less than perfect - perhaps because the property is in a secondary location or perhaps because the borrower's credit score is not high enough. Perhaps the tenants in the building are financially weak, like a tanning salon or a nail salon, or perhaps many of the existing leases mature in the next year or two. If the tenants don't renew their leases, the property could potentially be 70% vacant in a couple of years. There is something about these commercial loans that is less than prime.
What is the Difference Between a Non-Prime Commercial Loan and a Sub-Prime Commercial Loan?
There is really very little difference between a non-prime commercial loan and a sub-prime one. Sub-prime was the name assigned to these slightly-flawed commercial loans by Wall Street in the early 2000's. Wall Street developed the new name, non-prime commercial loan, because of all of the bad press associated with the word, sub-prime, after the Great Recession. The only substantive difference is that non-prime commercial loans are fully-documented. In other words, a non-prime lender will ask for all of the same documents as a bank - financial statements, tax returns, leases, etc. Sub-prime commercial loans were not documented with tax returns. These old-time loans were driven mainly by the borrower's credit score.
How Long Does a Commercial Loan Take?
Bankers and many other commercial lenders will often tell you 30-45 days. They are not exactly lying. They are just speaking finance-ese. If you take out your trusty English-Finance-ese dictionary and you look up "30-45 days", it translates to 55-70 days.
Why do commercial real estate loans take sooooo long to process? Answer: It's the appraisal. Commercial property appraisals usually take at least 45-60 days; and lenders don't just order the appraisal immediately because of the cost. Commercial lenders first have to study the operating income and expenses and then size the deal. Then they have to issue a Term Sheet. Then the borrower has to study the Term Sheet, sign it, and return it with his money for the third party reports. All of these steps take time. The good news is that most commercial lenders close their new loans within 10 days of receiving the completed appraisal.
What if you don't have time to wait two-and-a-half months? Private money / hard money commercial lenders can move much faster, but you will pay a very painful premium for that speed. You could easily pay two extra loan origination points and 4% to 5% more in interest rate, all to close the loan 25 days faster. Don't do it. Just show your seller or your foreclosing lender your signed Term Sheet. He might threaten and huff-and-puff, but in real life, he will all wait. Experienced commercial-investment investors and brokers know that commercial real estate loans seemingly take forever to close.
Moral of the story: Start your commercial loan application process as soon as you can.
"But George, I have this broker who says he can close my bank loan in just 5 weeks." Uh-huh. Sure, he can. Just ask him, "Will the bank require an appraisal?" (Of course it will!) Now you know your answer. "It's the delay created by the appraisal, Silly!"
Where Should I Go To Apply To Apply For a Commercial Loan?
- I own C-Loans, Inc., so obviously I am biased. But if you want the lowest commercial mortgage rate, I recommend that you enter your commercial loan application into C-Loans.com. It's a free site, paid for by our 750 hungry commercial lenders, where the borrower (you) enter just a quick four-minute summary of the commercial loan that you are seeking. The portal determines which of our 750 commercial lenders are suitable and presents you with a Suggested Lender List of 20 or 30 commercial lenders. You put a checkmark next to the six most attractive lenders and press, "Submit." Within minutes you will be contacted by lenders quoting their most attractive commercial mortgage rates.
- You can also go to Yahoo Maps and plot your commercial property on a map. Then ask Yahoo to show you nearby banks. The final step is to start calling commercial lenders.
CommercialMortgageRates.co is owned by C-Loans, Inc., a Sacramento-based software development company. C-Loans, Inc. is the sister company of Blackburne & Sons Realty Capital Corporation, one of the oldest surviving private money (hard money) commercial mortgage companies in the country. Blackburne & Sons was founded in June of 1980, making the company over 35 years old. The C-Loans® Commercial Mortgage System was created in 1999.
George Blackburne III, Esq.
BLACKBURNE & SONS REALTY CAPITAL CORPORATION
4811 Chippendale Drive, Suite 101
Sacramento, CA 95841