Commercial Real Estate: Alternative Financing

Even though we have started to see money start to trickle into the commercial markets, lenders are still as picky as ever when it comes to who they will lend to and on what properties. As a result, you may not be able to find traditional financing if you’re trying to buy a property that doesn’t meet the high standards of most conventional lenders. However, here are some alternative ways you can get financing:

bridging loans

Mezzanine (bridge loans) are used when a borrower needs some additional funds to bridge the gap between the LTV of a home mortgage and the buyer’s equity. Mezz lenders are currently accepting returns in the 10 to 12 percent range. Bridge loans can also be used for properties that need to be renovated or need construction to be completed.

government programs

Federally supported entities (HUD, Fannie Mae, etc.) can also offer financing for borrowers looking to purchase a multi-family property. These entities offer both first mortgages and bridge loans. Which entity you go with, however, will depend on your long-term goals.

fanny mae It currently has very good interest rates, but it also has some pretty steep prepayment penalties if you decide to sell or pay off the loan before the end of its term. In many cases, these penalties will exceed the benefit of the lower interest rate.

freddy mac recently launched a new program that combines a typical first mortgage as well as a Mezzanine (bridge loan). The combination of the two loans allows you to buy a property with an LTV of up to 85 percent.

there is also the HUD 221(d)(4) program that not only has a high LTV, but also has a 35-year non-recourse term. This program allows the borrower to invest less cash up front, and because it is a longer-term loan, it also allows for much lower payments without any prepayment and penalties. A requirement of the program is that it is only available in larger multi-family properties built in 2000 or later.

Tea Small Business Administration offers another great program to help business owners purchase commercial property that they will use for business purposes. Tea SBA 504 The loan program allows a buyer to borrow up to $2 million and allows for up to 90% financing. To qualify, you must use more than 50 percent of the property for business purposes.

equity partner

In the event that you can’t find financing in these or any other loan programs, you may be able to find an equity partner to help fill the gap. In this situation, you would accept the partner in a joint venture. Just make sure that when you draft the terms of the joint venture, you address how much decision-making authority your partner will have, if any, and what percentage of the capital/profits they will share.