In preparation on my big upcoming training article entitled, "How to Quote a Commercial Loan," you need to know what types of commercial property that banks will finance. We can all guess that a commercial bank is unlikely to finance a gentlemen's club or a cannabis dispensary, but what about a used car lot or a bowling alley?
Here's the thing about banks. Banks are portfolio lenders. Portfolio lenders make portfolio loans. A portfolio loan is loan that the lender has no intention of ever selling off. The bank will hold the loan until maturity. As a result, the bank is free to use common sense and special expertise in underwriting the deal. It doesn't need to underwrite the loan or structure the payments in any standard way.
For example, suppose a successful young doctor wants to buy a medical office condo, but the deal does not cash flow at any higher than 52% loan-to-value. This is common in office condo's because they sell for very high prices per square foot. A commercial bank making a portfolio loan is free to make a 75% LTV loan on such a purchase because the M.D. might be making $600,000 per year. The bank is free to use global income.
Global income is a way of underwriting a commercial loan where the bank looks not at just the rental income the property is capable of generating, but the bank also considers the borrower's outside income, like his employment income or his investment income.
Here is an example of a bank making a portfolio loan based on its special expertise. Suppose the owner of the bank is from New York City, where many apartments have been turned into co-op's. Few lenders anywhere in the country will finance co-op's, but a commercial bank with special expertise is free to do so.
The second thing to understand about banks is that they will finance almost any type of income producing property - including bars, restaurants, used car lots, and bowling alleys - as long as the borrower is making lots of money and keeps a big horde of cash in the bank. The bank most likely to finance a successful restaurant will either be the borrower's own bank or a nearby bank wishing to steal the banking business of this wildly successful restaurant owner. Other than these two situations, business properties are seldom financed by banks.
So what is a business property? A business property is one that is specialized and management intensive, where the property's ability to produce income depends on the owner being there every day to operate the business. In the event of a foreclosure, it would be very expensive for the bank to hire any sort of management company to run the property. Examples of business properties include, small unflagged motels, RV parks, campgrounds, miniature golf courses, and bowling alleys.
Keeping in mind that banks are portfolio lenders and will even finance business properties, as long as the operator is making lots of money and keeps a big horde of cash at the bank, below is a list of the property types that a commercial bank will finance.
BANKS WILL FINANCE THESE COMMERCIAL PROPERTIES
Auto dealerships / Used car lots - If VERY successful
Agricultural or Ranch Properties - If the bank has special expertise in underwriting them
Assisted Living Facilities
Bowling Alleys - If VERY successful
Bed & Breakfast Inns - They cash flow very poorly
Congregate Care Facilities
Commercial or Retail Buildings
Churches - Only filthy rich ones in superb neighborhoods
Cooperatives - Requires special expertise
Golf Courses - Tough to place. Most are losing money hand over foot.
Hotels & Motels - Must be either flagged or making tons of money.
Industrial Condo - They cash flow very poorly
Land - Purchase money deals for experienced developers greatly preferred.
Marinas - Must enjoy good occupancy and a good cash flow
Mobile Home Parks
Movie Theater - Better be making good money
Mixed Use Property - Apartments over retail or commercial very acceptable
Office or Commercial Condo's - They cash flow very poorly
Parking Garage - Needs to be making reliable money
Restaurants - Needs to pay lots of taxes and the owner must keep lots of cash.
Residential Condo Subdivisions - Bankers lost their tails in 2008. Better be perfect.
Residential Subdivisions - Bankers lost their tails in 2008. Better be perfect.
Self Storage - Ideally they should be gated
Shopping Centers / Strip Centers (Mini-Malls)
Skilled Nursing Facilities
Special Use Property - If VERY succesful and owner has TONS of cash
BANKS WILL NOT FINANCE
Churches - Unless filthy rich in Beverly Hills
Gas Stations - Unless VERY new and VERY successful
Residential Care Homes - Houses used for old folks
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