But now let's assume your commercial loan request is pretty strong. Its bankable. The only black hair on this otherwise bankable deal is the fact that about 8,000 sf of the total 65,000 sf of space is vacant. Your borrower needs the income from that vacant space in order to qualify for a commercial loan large enough to pay off his balloon payment. "Quick, Jack, what do you do?" (Dennis Hopper to Keanu Reeve in the movie, Speed.)
The good news is that banks are so hungry for commercial loans these days that they will listen to a good argument and a special structuring of the deal. Here is what you do: Tell the bank that they can hold back, out of the proceeds of the loan, enough money to pay for the anticipated tenant improvements and leasing commission to lease that last 8,000 square feet worth of space. If the borrower is pretty wealthy - in order words he has plenty of global income - this should be enough of a fix to get Loan Committee comfortable enough to approve the loan.
Global income is the totality of the borrower's income, including his employment income, interest income, dividend income, and other net rental income. If, in the above example, the borrower is a heart surgeon pulling down $600,000 per year, you can be sure that some bank would refinance his entire balloon payment.
Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. For example, a tenant might insist on two handicap-accessible bathrooms, a reception area up-front, and a number of private offices in the back. The lessor pays for these specialized improvements in order to attract the tenant.
What if the borrower is not a heart-surgeon, but rather he is just a real estate investor with a decent, but not huge, amount of outside income. Now what do you do? You could have the lender hold back the anticipated rent of the vacant 8,000 sf of space for, say, six months, out of the proceeds of the loan, in order to give the borrower time to rent that vacant space. This reassures the lender that the borrower will have enough dough to make his payments during the lease-up period. Remember, banks want to make commercial loans today. This structure gives them an excuse to approve the loan.
There is another way to structure your deal. Your lender could give you an earn-out. An earn-out is defined as a provision in a commercial real estate loan where the commercial lender agrees to release more money to you upon the happening of a certain event; e.g., the leasing of more space or a major tenant renewing its existing lease.
Example:
Jones Development recently completed construction of an 800,000 sf lifestyle center in Houston. The $32 million construction loan from Choppy Bank is now due. Snoopy Life Insurance Company has approved a $34 million takeout loan, but Jones Development is not satisfied with the loan size. The developer complains that when the last 85,000 sf of space is leased that they could qualify for a $40 million loan. Snoopy Life therefore records a $40 million first mortgage, but it only releases $34 million. When the last of the 85,000 sf has been leased out, Snoopy Life will release the remaining $6 million.
A lifestyle center is a huge mall for fat people. Huh? I'm kidding, of course, well... I'm only half-kidding. Americans have packed on a lot of pounds over the past two decades (me included), and we no longer like to hike two miles around malls. Its too much walking and too much exercise. Therefore lifestyle centers are huge malls where we can drive right up to the door of the particular store in which we want to shop.
Two paragraphs above I used the term, "takeout loan". A takeout loan is just a garden-variety permanent loan on a commercial property that is used to pay off the construction loan.
I just love the funny pic below. This is such good marketing:
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Every commercial real estate broker should also be a commercial mortgage broker. Why? There is no better way to meet wealthy commercial real estate investors than to advertise that you make commercial real estate loans.
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