- Is there an application Fee?
Yes. There is an application fee and in most cases the fee is non-refundable. Understanding that commercial loans are different than residential loans is critical. The lender has to do a lot of work on the front just to get the loan process started to even determine if a loan can be made.
The loan application fee covers these initial research and set-up expenses. In some cases the fee is waived, this is usually done for borrower’s that are well organized and willing to cooperate without too much fuss.
- How much is the application fee?
In cases where the application fee is not waived, the application fee can be as little as $500 or as much as $2,000. The amount is determined by the size of the loan being applied for and by the complexity of the transaction.
- What kinds of documentation are required for commercial loans?
On Full Doc loans the borrower will be required to show 2-3 years of tax returns, both personal and business with ALL schedules. Most lenders will also require a personal financial statement as well as ALL leases on the property and all property expenses for the past year to five years.
Lesser documentation loans such as Stated Income are available and will require much less documentation but will most likely have higher rates and fees and could have shorter amortization periods.
- How long does it take to close a commercial loan?
Because of the complex nature of commercial loans, it can take quite a bit of time to close a transaction. Be wary of anyone that claims they can close a commercial loan in less than 30 days. If this is the case then you’ve probably been roped into a commercial hard money transaction and your fees and interest rates are much higher than they could be. Most commercial transactions take 60-90 days. Less complex transactions can be handled in as little as 45-60 days.
- Can I lock my rate in a commercial loan like I do in a residential loan?
To the surprise of many, rate locks are available on commercial loans. Some commercial lenders will require a rate lock fee/commitment. This fee is typically 1% of the loan amount and the fee may be refundable at the table in the form of prepaid closing costs.
- I hear commercial loans can be expensive, what does it cost to obtain a commercial loan?
Many times there are upfront fees associated with a commercial loan. You will most likely be asked to pay for your appraisal, environmental and survey in advance. You will also be asked to pay in advance for underwriting at the time the loan commitment or term sheet are presented to you. Commercial loans typically have higher origination fees. Be prepared to pay from 1-4 points at the table.
Special Note: Some lenders do NOT allow closing costs to be financed into the loan. In these cases you will be asked to bring a check to the table to pay for your closing costs. In these special situations it might be necessary to be prepared to create a cash-out transaction that is slightly more than the closing cost amount.
Warning: Some unscrupulous lenders charge Due Diligence fees. These fees are usually requested before any type of a term sheet or commitment have been offered, are non-refundable and can be as high as $10,000 to $20,000. Never pay Due Diligence fees. Only pay underwriting and commitment fees, there is a huge difference. In our opinion Due Diligence fees are unethical.
- What is a typical origination fee and are there any discount points?
The typical origination fee for a commercial loan can range from as low as 1 pt. to as high as 10 pts. Discount points are optional but can be used to buy down the rate or the prepayment period if desired. Most commercial loans will have 2-5 points of origination. (that’s 2-5% of the loan amount)
- What is DSCR?
DSCR and DSR are two terms that you will see a lot when dealing with commercial loans. Debt Service Coverage Ratio or Debt Service Ratio (DSCR or DSR) are the ratio of the income produced by the property compared to the debt on the property.
A DSCR of 1.25 would mean that the lease payments/gross rents would need to be 25% more than the payment on the property. Many lenders calculate the Taxes and Insurance along with Principal and Interest in their calculation of the DSCR.
- Are Taxes and Insurance escrowed in a commercial loan?
In most cases the taxes and insurance are NOT escrowed. Payment of Taxes and Insurance are the sole responsibility of the property owner.
- What is the amortization period of a commercial loan?
The amortization period for commercial loans can vary. Typically they start at 10-15 years and can go as high as 35 years. The most common
commercial loans are amortized for 15-25 years. Many factors can affect the amortization period. They include: the property type, the credit
worthiness of the borrower and the assets of the business.
- What types of loans are available?
The types of loans that are available in commercial are as varied as they are in residential. You can have fixed rate loans, loans with balloon payments and even ARMs. Typically, the lowest rate commercial mortgages are adjustable rate mortgages with lengths of 3, 5, 7 or 10 years.
- What does recourse and non-recourse mean?
A recourse loan is one where the borrower places a personal and/or a corporate guarantee on the loan. Non-recourse loans do not require a guarantee and much of the lending decision is based on the strength of the borrower, and of the property in regard to cash flow from the leases, and equity in the property value.
- What is a Blanket Loan and how does it work?
A Blanket Loan is any loan that covers multiple properties with one loan. The Blanket Loan typically has specific requirements and is usually tailored for use by real estate investors who need to consolidate a large amount of residential or commercial property under one loan.
- Is there a minimum requirement for the number of properties in a Blanket Loan?
Most lenders will require that a borrower place a minimum of 5 properties in a Blanket Loan.
- In a Blanket Loan, what happens if I sell a property?
Most Blanket Loans contain a release clause. This clause spells out the conditions for release of a property in the loan. Many Blanket Loans contain a period for which the properties will be ‘locked’ and no release will be allowed. After this period properties may be sold with a portion of the sale proceeds going towards principal reduction and the rest being received by the property owner as profit.
- Do you lend anywhere?
We can lend on commercial property in North America, Central America, South America and the Caribean.
- Are there any prepayment penalties?
Yes, no, well maybe … Commercial loans are completely negotiable. You need to familiarize yourself with terms used by the specific lenders that you are dealing with. Many lenders have prepays, they can be ‘hard’ (meaning that you owe it whether you sell the property or not) or they can be
‘soft’ (meaning that you don’t owe anything if you sell the property).
Prepays usually decline over time but can be fixed. You can ‘buy out’ or ‘buy down’ a prepay at the front of the loan in the form of higher interest rates or additional points. The bottom line is prepays are negotiable but be prepared, in the end you will probably end up with some sort of prepay penalty.