As there are different types of commercial properties, similarly there are also different types of commercial loans offered for them.
What’s even more confusing is that the rules change from property to property. And to add to this confusion, some of the terms mean the same thing . It can get very confusing very fast.
Let me begin by sharing with you the 4 basic types of loans, regarding residential and commercial financing. There are basically 4 types of financing but there are numerous variations of each. At the core of it all, there are basically only four types.
1. Acquisition Financing
The main purpose of these loans is for acquire or purchase something. Acquisition financing comes in many flavors and forms as “Hard Money, Bridge Financing, Mezzanine financing, Debt financing or a combination of the above. If it financing to purchase something, then it falls under the acquisition umbrella . Acquisition loans can be for improved or unimproved properties.
For instance, financing to purchase an apartment complex would be considered and improved property because the land has been improved from it’s original state. On the other hand, the purchase of 5 acres of land would be considered unimproved property because the land is in it’s natural undeveloped condition. Acquisition financing can be used in both situations but the terms will be different. On undeveloped land purchased, typically you can only get 50% of the purchase price compared to 80% for improved properties. And I might add that there are exceptions to all these general practices. We’ve done commercial loans up to 99% of the actual value. | Acquisition financing Program details |
2. Construction Financing
Construction loans are typically used by Developers and General contractors. They simply borrow money to construct something and then sells it at a higher price and use the proceeds to terminate the construction debt. We like working with Developers and contractors because they are like professional borrowers, and are typically very effective in meeting deadlines. Unlike Investors, Developers and General contractors actually add real value to a property. Construction loans are typically a bit more expensive that acquisition loans and are typically short term loans being less than 5 years. Construction loans can come in a variety of shapes and forms and can be very creative. I might add again, there are exceptions to these practices. I have found Developers and General contractors to be easy to work with and very knowledgeable . This is the niche we enjoy working in the most. Unlike investors, developers and contractors pass all their cost on to investors making them the ideal partner and client.
|Multi Family Construction Loan Program |
3. Rehab/ Repair/ Improvement Financing
Rehab financing is basically financing to improve or to repair improved property. Unlike construction financing, which is for improving unimproved land, rehab financing is for improved properties only. There are hundreds of loan programs and variations available for rehab loans such as: Acquisition and Rehab loans. This type of financing provides financing for the purchase and repair into one loan. As with construction financing, the borrower must provide detailed plans and the cost of the repairs. These are short term loans and the borrower typically will make the repairs to increase the value and then refinance the property at the higher value with permanent financing. Some lending programs have very clear guidelines that distinguish “cosmetic repairs” from “major rehab”. Some Lenders consider major rehabs to be at least $12,500.00 per unit. If the repair amount is less than the Lender’s limits, the repairs will be considered as cosmetic repairs and the loan may be denied or modified.
|Multi family rehab loans |
This is the process of paying off an existing loan and replacing it with a new loan. This process is also known as debt restructuring an more commonly as refinancing. Refinancing can only be started by the property owner. The borrower must be the legal owner of the property in order to refinance a debt.
“I can’t refinance your property
nor can you refinance my property”.
A owner will typically use refinancing to pull tax free equity our of a property, to get a better mortgage or to finance repairs or improvements. In the pass, when I was heavily invested in residential rental properties, I used a FHA Title 1 Property improvement loan to finance my repairs. This loan was recorded as a 2nd mortgage and all I need to get the loan was the Title to the property. I used my local bank for this because the loan was insured by the FHA. The process was very straight forward. I went to the bank and completed the application, submitted a list of repairs and their cost and 10 days later I went to the bank and received a check for the repair amount. No reserves and no one ever came to verify that the repairs were actually done. Once the repairs were completed, I immediately refinanced the property for 80% of the new higher value.
In 2 instances, I have used refinancing as a back door to purchasing a property. Here’s how:
1. I had the owner to refinance the property.
2. I assumed the loan by paying a 1 % assumption 10 days after the refinancing was completed. My loan broker later informed me that I could have assumed the loan the same day. My ignorance cost me additional closing fees of about $325.00. Pretty inexpensive lesson because on the second transaction, I recovered this expense.
The thing to remember is refinancing can be use in various creative ways. The key thing is that the loan must be assumable. In situations where the loan is not assumable, this will not work. Although there are ways to work around non-assumable loans and “due on sale clauses”, I will address those in a separate post.
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