Commercial Real Estate Loan

Making Sure The Figures Add Up In Your Commercial Real Estate Loan

Let’s take a look at the anatomy of a commercial real estate loan. Most ordinary bankers will finance 70 to 80 percent loan-to-value. I’m going to set the record straight here. Loan-to-value means the lesser of appraised value or purchase price. For example, you might buy a million dollar office building, which is its appraisal value, but somehow—maybe the owner’s getting divorced and needs to access liquidity as quickly as possible—you’re able to get the property for $750,000. A 25 percent discount on the property. Your banker is going to finance 70 to 80 percent of the lesser purchase price, the $750,000, not the million dollars that it’s valued at. This is a case of what I call “embedded equity”. You made a good deal — you have $250,000 of appraised value in or embedded in the property — but traditional financing won’t enable you to access it. You’ll have to wait two or three years until it’s been seasoned a little bit, and then maybe you can pull some of that embedded equity out by refinancing.

We not only finance loan-to-cost—the true project cost, not just purchase price—but if renovations are involved we finance those, too. We also finance soft costs, things like permitting and impact fees and architecture and engineering fees. And we finance closing costs, and in most cases we can even finance FF&E, (furniture, fixtures, and equipment).

Add all hard and soft costs together, and we generally finance 90 percent of the total project amount. Compare this to the 70 to 80 percent loan-to-value of the property by itself offered by the bank, in addition to covering soft costs and closing costs out of pocket. So you’re not really putting 20 to 30 percent down when you get a commercial real estate loan from a bank. You’re probably putting more along the lines of 25 to 35 percent down. With us it’s a true 10 percent.

Meanwhile most bankers, especially these days, are trying to figure out ways to say no to deals because they don’t really want to take on a new asset, a new commercial real estate loan. Rightly or wrongly, they have to look at the worst-case scenario. When they take on an additional loan, they’re taking on more risk, something bankers are very averse to these days. Why? Because they’ve been vertically integrated for so long, offering forty or fifty products. Some of those products blew up in their faces, and they’re paying for it right now, as opposed to sticking to their knitting, which is what we’ve done all along.

Our SmartChoice Commercial Real Estate loan—also known as the 504 loan—is a product bankers (commercial loan officers, that is) don’t like to talk about because they make less money on it. But I’m a big believer in offering the best product and doing right by your clients, and then letting your clients do right by you. And I have evidence this works on my side: About 90 percent of our business comes from referrals of some sort, which is almost unheard of in our industry.