Redifining 'Doable'
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Special-use properties like restaurants, hotels, and car washes are difficult to finance due to their specialized nature. They are often harder to convert to other uses than traditional commercial properties. Lenders are cautious approving loans for special-use properties, typically requiring 20% equity and only financing 80% of the property value. Additionally, the equipment involved in special-use businesses requires shorter loan terms that are challenging for borrowers. Considering the total project costs rather than just property value helps make special-use projects more feasible to finance.
Redifining 'Doable'
- 1. REDEFINING ‘DOABLE’ By Christopher Hurn, president, Mercantile Commercial Capital Illustration: Keith Negley S - often cannot acquire and use as-is for another properties than they do with straight-forward designed and constructed with a particular purpose. Restaurant properties, for example, acquisitions. purpose in mind. can make great office buildings because they One issue is potential vacancy. An office For example, a building with a large open kitchen usually are well-located, though some remodel- building, for example, is said to have multiple area with extra plumbing often is best-suited for ing might be needed. The same can’t be said for uses for multiple users or types of tenants. In a restaurant — and not much else. a carwash. other words, if an architectural firm moves out, When you’re faced with securing financing Because of the specialization of these proper- another professional firm can usually take over for restaurants, hotels, motels, day cares, car- ties, along with the equipment usually involved the vacant space with little trouble. washes, gas stations or assisted-living facilities, in their operations, commercial lenders generally Specialized deals, however, are becoming to name a few, it’s best to be prepared for what proceed with great caution when presented with increasingly harder to do, especially when they you’ll encounter in the commercial lending special-use and single-use deals. are constructed from the ground up. With tra- marketplace. These are often the most-difficult commer- ditional commercial lenders, your clients often Special-use properties are often lumped cial properties for which to secure financing. can expect no better than 80-percent loan to together with single-use facilities, but that But they’re not impossible for brokers who know value (LTV). might be too much of a generalization. The what lenders seek. While 20-percent equity may not seem too difference between the two comes in the ease terrible for a borrower at first glance, remember of conversion. What to expect that special-use properties tend to involve quite Special-use facilities often are easier to con- Even in an ideal economic environment, bank- a bit of specialized equipment. This equipment vert than single-use facilities, which businesses ers have a more difficult time with special-use Continued … R F S G C E ., J All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Publishing Inc.
- 2. Redefining ‘Doable’ you try to place the loan. financed as part of the loan. Many commercial Again, greater equity injections are often lenders do not offer this, though. … Continued required of borrowers with special-use proper- Most commercial lenders that offer LTC com- often is financed over much-shorter terms, often ties. Putting less money down and easing initial mercial loans finance 85 percent to 90 percent with three-, five- or seven-year amortizations. cash-flow concerns with longer amortizations of a project’s total cost. When 90-percent-LTC Thus, it can be difficult for these clients to inject can help your clients better afford their project financing is applied to special-use construction that much equity into a deal without affecting in the long run. projects, for example, it’s often equivalent to their cash flow. And in softer economic times, nearly 95-percent LTV after including all soft capital and cash flow are critical. How to look at costs costs and other construction-related costs, such When you remember this for your com- as contingency and interest reserve. While most traditional commercial real estate Thus, for borrowers with special-use prop- mercial borrowers, you’ll likely be busy in good financing focuses on LTVs, it often is better for erties, LTC financing often can paint them a times and in bad. special-use borrowers to secure financing based clearer financial picture. on the loan-to-cost (LTC) amount. This takes New DSCR realities your clients’ total project cost into account, not In special-use deals, your debt-service-coverage just the lesser of the appraised value or purchase The next time you work on a special-use proj- ratios (DSCRs) are key. You should see if the price of their property. ect, think about getting financing that will suit your clients’ needs and put them in a better po- “SPECIALIZED DEALS ARE sition to grow. Despite the economic turns, this is a great time for owners of small and midsized BECOMING INCREASINGLY businesses to invest in their commercial proper- ties — if they do it right. HARDER TO DO, Help your clients make the right decisions, and you might reap the rewards yourself, as well. ESPECIALLY WHEN THEY ARE CONSTRUCTED FROM THE GROUND UP.” Christopher Hurn is presi- dent of Mercantile Commercial Capital, the nation’s leading 90-percent loan-to-cost com- deal’s cash flows — in other words, if the bor- Special-use-project costs can differ from mercial loan provider. He is one rower can repay the debt on the loan. those of conventional projects. They include: of Coleman Publishing’s “Top Normally, an acceptable DSCR is 1 to 1.2. 12 Most Influential SBA Lend- The property’s purchase price; This means the special-use-business owner ers” for 2008 and has received awards from the has enough cash to cover the total debt — the Construction and renovations; National Association of Development Companies proposed loan and any other long-term liabili- Soft costs, such as fees for the architect, engi- and the Small Business Administration. MCC also ties — and then some. neer, permits or impact; ranked on the 2007 Inc. 500 list of the fastest-grow- With special-use projects in today’s economy, ing private U.S. companies. Visit www.504Experts. Closing costs; and com or call (866) 622-4504. Hurn is expanding however, lenders often seek a DSCR of 1.2 to 1.4. The stronger the borrower’s cash-flow-coverage Furniture, fixtures and equipment, which MCC nationwide; visit www.ACE-Report.com. ability, the better off you’ll be as a broker when could help the cash flow of a business when SBA: A PRIMER For a number of special-use loans, U.S. Small Busi- less money down for their commercial properties ness Administration (SBA) financing could be an and because of the ability to get the least-expen- option. sive capital available on nearly half their loans. Bankable borrowers have chosen the SBA’s 504 For a primer on the SBA’s 504 program and its program over conventional financing because of other options for small businesses, visit www.sba. the high cash-on-cash return they get by putting gov/services/financialassistance. R F S G C E ., J All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Publishing Inc.