Unsecured Business Lines of Credit

Do you need working Capital for your business?Are you self employed and in need for down payment for your home? or office?Are banks giving you a hard time asking you for papework? We have the solution for you…. UNSECURED BUSINESS LINE OF CREDIT Yes, that’s right, the Unsecured Business Line of credit eliminates the hassle of acquiring capital for your business or any other investment that you may want to accomplish. Our minimum Loan Amount is $100,ooo up to $500,000 and best of all NO INCOME DOCUMENTATION OR ASSET DOCUMENTATION REQUIRED!All we need to verify is that your business has been operating for the most recent two years & that the lowest of all 3 credit scores is at least 680. So don’t hesitate and feel free to contact us for a free consultation.We would be happy to assist you!!! Feel free to contact us! ejortiz@pacificdl.com 

FAQ’s

Q. How much money do I have to put down on my Purchase?
A. Most commercial loans will only provide financing up to 85% of your purchase price. However, this figure varies based upon the type of property. The maximum percentage is typically reserved for multi-family properties, while properties considered “more risky” such as restaurants and gas stations may only be eligible for 70-75% maximum financing. However, in both cases, a seller is typically permitted to offer privately-held financing of up to 5-15% above what the financial institution will offer. However, this may increase the pricing of your institutional loan and lower the percentage of financing that the institution is willing to extend to you.

Q. What about an SBA loan?
A. SBA loans typically offer a higher percentage of financing than traditional banks do, and their rates are typically much better. But, there is a catch. The SBA loan process is arduous and lengthy, and loan fees can be higher than traditional lending venues. Even more important, the SBA loan will typically require you to “cross-collateralize” your personal residence or other properties that you may own now or even in the future, that may have little or no mortgage on them. In this case, it will be very difficult, if even possible, to access equity you may have in these other properties, should you need to, without having to take extensive and frustrating steps to do so. SBA loans also fit a very specific type of borrower. It’s almost like trying to fit everyone into a size 6 dress or size 28 jeans. It’s perfect for some, but there are many that this program just doesn’t fit.

Q. How do I calculate the Net Operating Income of my property?
A. Without getting too technical, we’ll give you the basic formula. Add up all of the income generated from your property such as rent, fees, etc on an ANNUAL basis. Then subtract all of the expenses associated with operating this property such as repairs, utilities, and taxes and what you have left over is your Net Operating Income, also known as “NOI”. Keep in mind, however, that your NOI does not take into account your mortgage payment on the property. That number is used in another calculation process known as Debt Service Coverage Ratio.
The more technical formula is: Potential Gross Income + Other Income – Vacancy – Real Estate Taxes – Operating Expenses = Net Operating Income

Q. What does Debt Service Coverage Ratio mean?
A. To put it simply, Debt Service Coverage Ratio, otherwise known as DSCR, is the number that indicates how profitable the commercial property is. For example, a DSCR ratio of 1.50 means that for every dollar you spend on the property to keep it running, you are bringing in $1.50 in income. As a standard, the lowest DSCR that most lenders will accept is 1.25.

Q. How do I calculate Debt Service Coverage Ratio?
A. In order to calculate a Debt Service Coverage Ratio you will need to know what the annual mortgage payment on the property will be. You will take the annual mortgage payment on the property and divide it into your Net Operating Income. The number you end up with should have a decimal in it. For example, if your Net Operating Income is $763,456 and your annual mortgage payment is $435,000, then your DSCR is 1.755 which is typically a good DSCR to most lenders.

Q. What is a “Cap Rate”?
A. “Cap Rate” is short for capitalization rate. Essentially this is the market rate for your type of property in your subject property neighborhood. It is one of the ways appraisers determine the value of your commercial property. This number will vary dramatically by neighborhoods and property types. It is reflective of the supply and demand for your type of property in your particular neighborhood. For example, the cap rate in a college town on an apartment complex will be much lower than a cap rate on an apartment complex in rural Nebraska as the supply and demand will be much higher in the college town. The lower the cap rate, the better the news is for you. Here’s the basics of why. The appraiser will take your Net Operating Income of the property and divide it by the cap rate (as a tenth. IE: a cap rate of 8.5 will need to be divided into your NOI as “.085”). So obviously, the smaller the number is, the more times it will divide into your Net Operating Income. The final number of this calculation is usually a good indicator of the value of your property. For example, if the NOI of your property is $245,000 per year, and the cap rate for your property is 8.5, then the estimated value of your property is $2,882,352. This means that you will need to provide an accurate Operating Statement to your appraiser in order for them to properly calculate the value of your property. Keep in mind, this is only one approach an appraiser takes in determining the value of your property.

Q. What does “Stress Test” mean?
A. If you are applying for a loan that starts at a low adjustable rate, you may need to qualify at a worst-case-scenario rate. For example, if you were to start at a Prime + 2% rate, you would probably have no problem qualifying for the loan if Prime is at 5.25% since the rate would then be 7.25%. However, since you’re applying for an adjustable rate mortgage, the financial institution will want to make sure that you can still easily make your payment should Prime increase because obviously your rate will also increase at that time. So, the underwriter may underwrite the loan qualifying you with a “stress test” or “qualifying rate” of 10.25% in order to assure them that even if Prime were to increase dramatically, you would still be able to make your mortgage payments.

Q. What kind of credit do I need in order to qualify for a commercial loan?
A. If you were to deal directly with a bank or other type of financial institution, that institution may have a set requirement for a particular credit score or credit profile that you may be required to have. However, with most commercial loans that are brokered, the credit is not one of the first considerations in qualifying you for a commercial loan. The first consideration is the property type. The second is the income of the property. The third is your financial net worth and personal cash flow. And finally, your credit. Your credit score isn’t as important as your credit history. Having tax liens, derogatory public records, and recent late payments report on your credit is a huge detriment in your approval process. However, mortgage-lates on any property you own are equally as serious and may be the reason why you will be turned down for a commercial loan.

Q. Will I be required to buy Environmental Insurance?
A. Environmental Insurance is, unfortunately, a requirement for most commercial loans. However, the insurance cost should be minimal if your property is not known for environmental hazards. For example, an office complex would have a much lower premium for environmental insurance than a gas station.

Q. What does “Non-Recourse” mean?
A. In simple terms, a Non-Recourse loan is one in which, if the loan is defaulted on, the lender can only go after the property used as collateral, as opposed to a Recourse loan in which the lender can go after the company or business entity for repayment of that loan, or a Full or Personal Recourse loan in which the lender can go after the owners of the business entity and guarantors. Loans on properties other than multi-family properties typically require Full Recourse, meaning the guarantors and owners of the business will have to ensure timely payment of the loan.

Glossary

- A -

ACREAGE – a 2 dimensional measure of land equaling 160 square rods, 10 square chains, 4,840 square yards, or 43,560 square feet.

ADJUSTABLE RATE MORTGAGE – a mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that of fixed–rate mortgages, but monthly payments can go up or down as the rate is adjusted.

ADJUSTMENT INTERVAL – the period of time between changes in the interest rate for an adjustable–rate mortgage. Typical adjustment intervals are 6 months and one year.

AMENITIES – in appraisal, the non–monetary benefits derived from property ownership.

AMORTIZATION PERIOD – the period or length of time over which the principal portion of a mortgage loan is scheduled to be paid down through periodic payments.

ANCHORED – refers to a piece of commercial real estate property, which will serve as the main tenant in a shopping center.

ANCHORS – a long term, credit worthy tenant. The presence of one or more “anchors” enhances the value and the ability to obtain financing for a shopping center.

APPRAISAL – an estimate of the value of a property, made by a qualified professional called an appraiser.

ASSISTED LIVING – type of senior housing that is typified by independent living and limited assistance to its renters.

ASSUMABILITY – a mortgage loan which can be transferred to another person without a change in the terms of the loan.

AVAILABLE SF – the square feet available for lease.

AVERAGE ANNUAL OCCUPANCY – percentage of currently rented units in a building, city, neighborhood or complex.

AVERAGE DAILY RATE – a hotel rate used to evaluate the average daily rate of a hotel inclusive of vacancy and seasonality.

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BALLOON PAYMENT – one large payment for the remaining principal balance of a mortgage, due at a time specified in the contract.

BASIS POINT (BP) – 1/100th of 1% expressed as a margin over an index rate.

BORROWING ENTITY TYPE – the legal form under which property is owned.

BRIDGE/SHORT TERM LOAN – a short–term or interim loan for borrowers who need more time to find permanent financing or are repositioning a commercial property.

BUILDING PERMIT – a document, issued by government regulatory authority that allows a builder to construct or modify a structure.

BUILDING SF – the usable square footage of the building.

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CAP – the maximum, which an adjustable–rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.

CAPITAL EXPENDITURES – line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, etc.

CAPITALIZATION RATE – the ratio of the first year NOI to the asking price (NOI/Asking price). Not the rate of return.

CARVE OUT – the definition used for the inclusion of recourse in loan documents for fraud and misrepresentation.

CASH–OUT REFINANCING – when the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.

CENTRAL BUSINESS DISTRICT (CBD) – the downtown section of a city, generally consisting of retail, office, hotel, entertainment, and government land uses with some high–density housing.

CLEARANCE – the distance between the building’s floor and effective storage ceiling.

CLIMATE CONTROLLED – an industrial and self–storage term that represents temperature controlled commercial space.

CLOSING – the meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands.

CLOSING COSTS – the costs and fees associated with the official change in ownership of the property and with obtaining the mortgage, that is assessed at the closing.

CMBS (Commercial Mortgage Backed Security) – a bond or other financial obligation secured by a pool of mortgage loans.

COFI (Cost of Funds Index) – index used to determine interest rate changes for adjustable rate mortgages. It is based on the cost of funds of the 11th District of the Federal Home Loan Bank.

COMMERCIAL LAND – development and transitional land acquired for investment use: land for lots, site selection and assemblage of parcels.

COMPARATIVE MARKET ANALYSIS – an estimate of the value of a property based on an analysis of sales of properties with similar characteristics.

CONDUIT – the financial intermediary that sponsors the conduit between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from third party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CMBS market.

CONGREGATE CARE – a type of senior housing that typified by a central eating facility, smaller rooms, and a higher level of care for its tenants.

CONSTANT MATURITY TREASURE (CMT) – an index based on the U.S. Treasury that is used in the pricing of debt for banks.

CONSTRUCTION LOAN – a short term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take–out or permanent loan is used to pay off the construction loan.

CONSTRUCTION TYPE – the type of construction used for a commercial building, (i.e. concrete tilt–up, etc.).

CONTINGENCY – an element of an agreement that must be satisfied before the total agreement can be consummated.

COUPON – the coupon on U.S. Government securities expressed as an annual percentage of face value, is the interest rate the U.S. Government promises to pay to the holder on an ongoing basis until maturity.

CREDIT TENANT – a tenant, who has obtained a debt rating by S&P or Moody’s of “BBB–” or better.

CREDIT TENANT NET LEASE – a lease with a tenant that has a credit rating of BBB– or better.

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DEBT SERVICE – the periodic payments (principal and interest) made on a loan.

DEBT SERVICE COVERAGE RATIO (or DEBT COVERAGE RATIO) – measures a mortgaged property’s ability to cover monthly payments defined as the ratio of net operating income over the periodic payments (principal and interest) made on a loan. A DSCR of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.

DEFEASANCE – a clause in a mortgage that gives the borrower the right to prepay a commercial mortgage by purchasing US Treasuries in an escrow account to pay off ongoing debt service.

DENSITY – the number of buildings or persons occupying a certain area of land, generally an acre.

DEPRECIATION (ACCOUNTING) – allocating the cost of an asset over its estimated useful life.

DEPRECIATION (APPRAISAL) – a charge against the reproduction cost (new) of an asset for the estimated wear and obsolescence. Depreciation may be physical, functional or environmental.

DISCOUNT RATE – the rate of interest that the Federal Reserve charges member banks for loans.

DISTRIBUTION WAREHOUSE – (also called Light Industrial) Generally the least intense industrial use. Office use is limited to management tasks for the distribution or warehouse facility, or about 15 percent of total space.

DOCK HIGH – existence and/or number of dock level doors.

DOUBLE–WIDE – a mobile home consisting of two units which have been fastened together along their length.

DUE DILIGENCE – the legal definition: a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances. In CMBS due diligence is the foundation of the process because of the reliance securities investors must place on the specific expertise of the professionals involved in the transaction.

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EFFECTIVE GROSS INCOME – gross income of a building if fully rented, less an allowance for estimated vacancies.

ENGINEERING REPORT – report generated by an architect or engineer describing the current physical condition of the property and its major building systems, i.e., HVAC, parking lot, roof, etc. The report also determines an amount for calculating replacement reserves, if needed.

ENTITLEMENTS – a right to benefits specified especially by law or contract.

ENVIRONMENTAL REPORT – report generated by qualified environmental firms to determine potential environmental hazards in a building’s region or within the building itself.

ENVIRONMENTAL RISK – risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground storage tanks (LUSTS) on a property.

EQUITY – the difference between the fair market value and current indebtedness, also referred to as “owner’s interest.”

EQUITY LOAN – a loan for an equity position which represents an ownership position in a property or a loan for the participation in the profits of the commercial property

ESCROW – 1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.

EURODOLLAR – U.S. dollar denominated deposits at commercial banks outside of the United States.

EXTENDED STAY – a hotel that caters to a business traveler on an extended lodging period.

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FAIR MARKET VALUE – an appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy or sell.

FARM – land used for agricultural purposes for crop and livestock farming.

FEDERAL FUNDS (FED FUNDS) – Fed Funds is the interest rate charged by those banks with excess reserves on hand (reserves over and above the minimum required by the Federal Reserve) to those banks in need of overnight loans to meet reserve requirements. Since it is set daily, the Federal Funds rate is the most sensitive indicator of the direction of interest rates.

FIT–OUT – tenant improvements within a commercial property.

FIXED–RATE MORTGAGE – a mortgage with an interest rate that remains constant for the life of the loan.

FIXTURES – personal property which for some reason, such as the manner of attachment, has become realty. Such property is also referred to as chattel real.

FLEX SPACE – an industrial property, which has both an office and an industrial component.

FLOOR–TO–AREA RATIO (FAR) – the relationship between the total amount of floor space in a multi–story building and the base of that building. FAR’s are dictated by zoning laws, in effect, stipulate the maximum number of stories a building may have.

FORECLOSURE – the process by which a lender takes back a property on which the mortgage has defaulted. A service may take over a property from a borrower on behalf of a lender. A property usually goes into the process of foreclosure if payments are more than 90 days past due.

FOUNDATION – the concrete slab beneath the property, which holds the property in place.

FRANCHISE – a business arrangement undertaken for the purpose of marketing a product or service. One party (the franchiser) provides marketing and selling expertise for a fee to another party (the franchisee) who in turn sells the product or service in the marketplace.

FRANCHISE FEES – the fee is usually an initial purchase requirement plus an ongoing percentage of gross sales of the business.

FREESTANDING RETAIL – a building which contains only one retail business. Fast–food franchises and retail stores are often freestanding buildings.

FREESTANDING – one commercial building meant to be occupied by a single user.

FULL SERVICE – a hotel definition that represents services provided to its guests outside of lodging (i.e. room service, concierge services, and restaurant).

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GENERAL BUSINESS – includes all of business assets and equipment, may include property or land.

GENERAL PARTNERSHIP – in a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner.

GOOD FAITH DEPOSIT – a deposit made by a purchaser of real estate to evidence an honesty.

GOVERNMENT SUBSIDIZED – rents that are partly paid by the government (e.g. Section 8 residential subsidies).

GRADE LEVEL DOOR – a door at the ground level at the foundation.

GROUND LEVEL – existence and/or number of ground level doors.

- H -

HIGH RISE OFFICE – a commonly used expression referring to an office building, that is high enough to require an elevator

- I -

INDEX – an economic indicator, usually a published interest rate.

INDUSTRIAL – property used for industrial purposes, such as factories.

INDUSTRIAL FOR LEASE – industrial space available.

INTEREST – the sum paid for borrowing money, which pays the lender’s costs of doing business.

INTEREST RATE – the sum charged for borrowing money, expressed as a percentage

INTEREST RATE CAP – limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing interest rates.

- J -

JOINT VENTURE – an agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. For all practical purposes a joint venture is similar to a general partnership. However, once the purpose of the joint venture has been accomplished, the entity ceases to exist.

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LEASE ASSIGNMENT – an agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.

LEASE TYPE – Gross, Triple Net (NNN), Net Net (NN), Hybrid, etc.

LEASEHOLD IMPROVEMENTS – the cost of improvements for a leased property, often paid by the tenant.

LEASING COMMISSIONS – an amount earned by a real estate broker or leasing agent for his services.

LESSEE – tenant in a building.

LIBOR (London Interbank Offered Rate) – the rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans. Rates are quoted in monthly increments out to 1 year.

LIMITED LIABILITY COMPANY (LLC) – the restriction of one’s potential losses to the amount invested. The absence of personal liability. Provided to stockholders in a corporation and limited partners of a limited partnership.

LIMITED PARTNERSHIP – one in which there is at least one partner who is passive and limits liability to the amount invested, and at least one partner whose liability extends beyond monetary investment.

LIMITED SERVICE – a hotel that offers lodging services only.

LOAN PROCESSING FEE – the fee charged by a lender, to prepare all the documents associated with your mortgage.

LOAN–TO–VALUE RATIO (LTV) – the ratio between the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic, and varies by lending institution, property type, geographic location, property size, etc.

LOCK–OUT PERIOD – a period of time after loan origination during which a borrower cannot prepay the mortgage loan.

LOT SIZE – total square footage of the land.

LOW–RISE OFFICE – a commonly used expression referring to an office building that is too low to require an elevator.

- M -

MALL – (also called Super Regional Center) an enclosed shopping center with three or more major department stores which draws from a large trade area of 12 or more miles.

MANAGEMENT FEE – the agreed–upon compensation paid to a property management company for managing a real estate project. The fee is usually based on a percentage of effective gross income.

MANUFACTURING – (also called Heavy Industrial) auto making, textiles, steel, chemicals, and food processing are typical uses of such properties. Typically zero to five percent office space.

MARGIN – the amount that is added to an index rate to determine the total interest rate.

MARKETING EXPENSES – expenses accrued to market commercial properties.

MAT – Monthly Average Treasury

MATURITY – 1. The termination period of a note (e.g., a 25–year mortgage has maturity of 25 years.) 2. In sales law, the date a note becomes due.

MAX CONTIGUOUS SF – the amount of available connected square feet.

MAX LEASE RATE – the highest asking lease rate.

MEDICAL OFFICE – an office space which offers medical services.

MEZZANINE/SECOND LOAN – a loan secured by a mortgage or trust deed, in which the lien is junior, or secondary, to another mortgage or trust deed.

MID–RISE – a commonly used expression referring to an office building, that is high enough to require stairs, but too low to require an elevator.

MILITARY CLAUSE – a clause included in a lease of residential property, which allows the tenant to terminate the lease without penalty if and when the tenant is transferred to another location.

MIN LEASE RATE – the lowest lease rate available.

MIN. DIVISIBLE SF – the smallest amount of available square feet.

MIXED USE – a real estate development that contains two or more different uses all intended to be harmonious and complementary. An example would include a high–rise building with retail shops on the first two floors, office space on floors three through ten, apartments on the next ten floors, and a restaurant on the top floor.

MOBILE HOME PARK – a parcel of land zoned and developed for use by occupants of mobile homes.

MONEY MARKET – the market for short–term debt instruments.

MULTI–FAMILY PROPERTY CLASS A – properties are above average in terms of design, construction and finish; command the highest rental rates; have a superior location, in terms of desirability and/or accessibility; generally are professionally managed by national or large regional management companies.

MULTI–FAMILY PROPERTY CLASS B – properties frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well maintained by national or regional management companies; unit sizes are usually larger than current standards.

MULTI–FAMILY PROPERTY CLASS C – properties provide functional housing; exhibit some level of deferred maintenance; command below average rental rates; usually located in less desirable areas; generally managed by smaller, local property management companies; tenants provide a less stable income stream to property owners than Class A and B tenants.

- N -

NEIGHBORHOOD CENTER – (including Community Center) a shopping center anchored by a supermarket and/or drugstore, that provides convenience goods and services to a neighborhood. It is usually between 30,000 – 100,000 square feet, and draws from a one to three mile radius.

NET EFFECTIVE RENT – rental rate adjusted for lease concessions.

NET OPERATING INCOME (NOI) – total income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.

NET–NET LEASE (NN) – usually requires the tenant to pay for property taxes and insurance in addition to the rent.

NON–RECOURSE – a mortgage or deed of trust securing a note without recourse allows the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lender’s only recourse in the event of default is the security (property) and the borrower is not personally liable.

NOTICE OF DEFAULT (NOD) – to initiate a non–judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell (“NOD”) the real property collateral in the public records.

- O -

OFFICE – a structure used primarily for the carrying on of business.

100% PRIVATE PAY – assisted living designation where senior housing residents pay 100% of the rent versus by welfare or government subsidies.

OPERATING EXPENSE – periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for rent increases.

ORIGINATION – securing a completed mortgage application from a commercial or residential borrower.

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PERCENTAGE LEASE – commonly used for large retail stores. Rent payments include a minimum or “base rent” plus a percentage of the gross sales “overage.” Percentages generally vary from 1% to 6% of the gross sales depending on the type of store and sales volume.

PHASE I – an assessment and report prepared by a professional environmental consultant who reviews the property – both land and improvements – to ascertain the presence or potential presence of environmental hazards at the property, such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of an environmental hazard and, should one be found, will recommend additional review and/or mitigation efforts that should be undertaken.

POINTS (LOAN DISCOUNT POINTS) – each point is equal to 1% of the total amount of a mortgage.

POTENTIAL GROSS RENT – gross income of a building if fully rented.

PRE–LEASED % – to obtain lease commitments in a building or complex prior to its being available for occupancy.

PREPAYMENT PENALTY – fees paid by borrowers for the privilege of retiring a loan early.

PRIME RATE – the rate at which banks lend to their most creditworthy customers.

PRINCIPAL – 1. The amount of debt, not including interest, left on a loan. 2. The face amount of the mortgage.

PRO FORMA – (from Latin pro forma, “according to form”). financial statements showing what is expected to occur.

PROPERTY ADMINISTRATOR – person in broker’s employ who is responsible for updating and renewing a property listing, if it is different from the contact name.

PROPERTY GRADE – a stratification of property type that is indicative of the property’s ability to
command rental rates.

PROPERTY SUBTYPE – a property description that provides additional information to the lender.

PROPERTY TAX – taxes based on the market value of a property. Property taxes vary from state to state.

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R & D – these facilities are generally used in high technology markets and are broadly defined to include wide variations in markets across the country. R & D properties could have lab facilities, offices, warehouse facilities, or services such as carpentry or machine repair. Typically, each property allows a variable combination of office and other uses. The percentage of office space ranges from 20 to 100 percent, depending on the market and individual needs of the user.

RAIL SERVED – whether the building is served by railroad.

RANCH – land devoted to raising livestock under range conditions with forage grass as main source of feed.

RATE INDEX – an index used to adjust the interest rate of an adjustable mortgage loan (e.g., the change in U.S. Treasury securities (T–Bills) with 1–year maturity. The weekly average yield on said securities, adjusted to a constant maturity of 1 year, which is the result of weekly sales, may be obtained weekly from the Federal Reserve Statistical Release H.15 (519). This change in interest rates is the “index” for the change in a specific Adjustable Mortgage Loan).

RECOURSE – personal liability.

RECREATIONAL LAND – land devoted to commercial outdoor sporting activity and relaxation.

REFINANCE – to replace an old loan(s) with a new loan(s).

REGIONAL CENTER – a shopping center with one or two department stores and a variety of smaller stores. It is larger than 300,000 square feet and draws from an eight mile radius or more.

RENT ROLL – a list of tenants leasing a property, which details terms of lease, area leased, and the amount of rent being paid.

RENT STEP–UP – a lease agreement in which the rent increases every period for a fixed amount of time or for the life of the lease.

RENTABLE SQUARE FEET (same as Net Leasable Area) – in a building or project, floor space that may be rented to tenants. The area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building.

REPLACEMENT RESERVES – an amount set aside from net operating income to pay for the eventual wearing out of short–lived assets. Monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.

RESERVE FUNDS – in CMBS, portion of the bond proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as “reserve accounts”).

RETAIL – a property type which sells goods to consumers.

RV (REVERSIONARY VALUE) – the value of property at the expiration of a certain time period. In transportation, recreational vehicle.

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SALES BROKER – commercial real estate broker that represents client in the sale or purchase of commercial real estate property.

SECOND MORTGAGE – a mortgage that is second in priority because of the time of recording the mortgage or of the subordination of the mortgage.

SECONDARY MORTGAGE MARKET – the buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgages. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value (“par”) or above, but are usually sold at a discount. Not to be confused with a “second mortgage.”

SELF–STORAGE – (also called Mini–Storage) provides personal storage for lease by consumers.

SELF–AMORTIZING MORTGAGE – one that will retire itself through regular principal and interest payments. Contrast with balloon mortgage or interest–only loan.

SENIOR HOUSING – (includes Assisted Listing, Congregate Care, Senior Apartments and Skilled Nursing Centers) multi–residential property specifically designed for care of senior citizens and/or physically disabled persons.

SHADOW ANCHORED – a unanchored shopping center located near an anchored shopping center.

SINGLE WIDE – a mobile home consisting of one unit.

SITE WORK – the location or place of a plot of ground set aside for a particular type of land use.

SKILLED NURSING – a type of senior housing which offers on–site medical care.

SOLE PROPRIETORSHIP – ownership of a business, with no formal entity as a vehicle or structure.

SPREAD – number of basis points over a base rate index.

SPRINKLER – existence of fire suppression systems in the building.

STABILIZED OPERATING PROPERTY – the income generated on an annual basis from the commercial property is stable, consistent and reliable.

STRIP CENTER – a string of stores in a commercial area, totaling less than 30,000 square feet, without central leasing, management, or theme.

STRUCTURAL/ENGINEERING REPORT – a property Condition Report that outlines the current structural stability or instability of a property. The report will outline immediate costs needed to repair the property, as well as a maintenance program to maintain the property at its current status.

SUBURBAN – describes a town or unincorporated developed area in a close proximity to a city. Suburbs, largely residential, are often dependent on the city for employment and support services; generally characterized by low–density development relative to the city.

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TAX & INSURANCE IMPOUND – monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.

TENANT – one who is given possession of real estate for a fixed period or at will.

TENANT IMPROVEMENTS (TI) – the expense to physically improve the property to attract new tenants to new or vacated space which may include new improvements or remodeling. May be paid by tenant, landlord, or both. Typically, tenants are provided with a market rate TI allowance ($/sq. ft.) that the owner will contribute towards improvements. The tenant must pay for amounts above the TI allowance desired by the tenant.

TERM – the length of a mortgage.

THIRD PARTY COSTS – costs resulting from third party reports, whether it be appraisal reports,
environmental reports or structural engineering reports.

TIMBERLAND – land used for production of forest stands for commercial use.

TITLE – the actual legal document conferring ownership of a piece of real estate.

TITLE INSURANCE – an insurance policy that insures you against errors in the title search – essentially guaranteeing your, and your lender’s, financial interest in the property.

TOTAL ANNUAL OPERATING INCOME – total yearly income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.

TOTAL ANNUAL ROOM INCOME – a hotel definition that represent the gross annual receipts from room revenue.

TRAFFIC COUNT – the amount of incoming and outgoing traffic a retailer or self–storage building
generates over a fixed period of time.

TRIPLE–NET LEASE (NNN) – a lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as “Net Net Net Lease”).

TRIPLE–WIDE – a mobile home consisting of three units which have been fastened together along their length.

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U.S. TREASURY BILL – Treasury Bills, or T–Bills, are short term securities with maturities of up to one year. They are issued by the U.S. Government at a discount from face value. The price is quoted in yield, not dollars. At maturity, T–Bills are redeemed for full face value. T–bills are issued in three month, six month and 1 year maturities and are backed by the full faith and credit of the U.S. Government.

U.S. TREASURY BOND – Treasury Bonds are long–term securities with maturities greater than 10 years. Treasury bonds are coupon bearing securities that pay interest on a semiannual basis. Treasury bonds are backed by the full faith and credit of the U.S. Government.

U.S. TREASURY NOTE – Treasury Notes are intermediate term securities issued with 2, 3, 5, and 10 year maturities. Treasury notes are coupon bearing securities that pay interest on a semiannual basis. Treasury notes are backed by the full faith and credit of the U.S. Government.

UNANCHORED – a tenant in a shopping center, which doesn’t have an anchored tenant.

UNDERWRITING – the process of deciding whether to make a loan based on property cash flow, credit, and/or other factors.

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VACANCY PERCENT – the percentage of all units or space that is unoccupied or not rented. On a
pro–forma income statement a projected vacancy rate is used to estimate the vacancy allowance, which is deducted from potential gross income to derive effective gross income.

VACANCY – unoccupied units as a percentage of the total number.

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YIELD – the rate of return on a security, taking into consideration annual interest payments, purchase price, redemption value, and the time remaining until maturity.

YIELD MAINTENANCE – a prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.

YIELD TO AVERAGE LIFE – yield calculation used, in lieu of “Yield to Maturity” or “Yield to Call,” where books are retired systematically during the life of the issue, as in the case of a “Sinking Fund,” with contractual requirements. Because the issuer will buy its own bonds on the open market to satisfy its sinking fund requirements if the bonds are trading below Par, there is, to that extent, automatic price support for such bonds; they therefore tend to trade on a yield–to–average–life basis.

YIELD TO MATURITY (YTM) – concepts used to determine the rate of return an investor will receive if a long–term, interest–bearing investment, such as a bond, is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments. Recognizing time value of money, it is the discount rate at which the present value of all future payments would equal the present price of the bond (also referred to as “internal rate of return”). It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also referred to as a “bond yield table”) or can be determined using a programmable calculator equipped for bond mathematics calculations.

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Conduit Loans

WHAT IS A CONDUIT LOAN?

Commercial real estate first mortgage debt is generally broken down into two basic categories: (1) loans to be securitized (“CMBS loans”) and (2) portfolio loans. Portfolio loans are originated by a leader and held on its balance sheet through maturity. In a CMBS transaction, many single mortgage loans of varying size, property type and location are pooled and transferred to a trust. The trust issues a series of bonds that may vary in yield, duration and payment priority. Nationally recognized rating agencies then assign credit ratings to the various bond classes ranging from investment grade (AAA/Aaa through BBB-/Baa3) to below investment grade (BB+/Ba1 through B-/B3) and an unrated class which is subordinate to the lowest rated bond class.

Investors choose which CMBS bonds to purchase based on the level of credit risk/yield/duration that they seek. Each month the interest received from all of the pooled loans is paid to the investors, starting with those investors holding the highest rated bonds, until all accrued interest on those bonds is paid. Then interest is paid to the holders of the next highest rated bonds and so on. The same thing occurs with principal as payments are received. This sequential payment structure is generally referred to as the “waterfall.” If there is a shortfall in contractual loan payments from the Borrowers or if the loan collateral is liquidated and does not generate sufficient proceeds to meet payments in all bond classes, the investors in the most subordinate bond class will incur a loss with further losses impacting more senior classes in reverse order of priority.

The typical structure for the securitization of commercial real estate loans is a real estate mortgage investment conduit (REMIC). A REMIC is a creation of the tax law that allows the trust to be a pass-through entity which is not subject to tax at the trust level. The CMBS transaction is structured and priced based on the assumption that it will not be subject to tax with respect to activities; therefore, compliance with REMIC regulations is essential.

CMBS has become an attractive capital source for commercial mortgage lending because the bonds backed by a pool of loans are generally worth more than the sum of the value if the whole loans. The enhanced liquidity and structure of CMBS attracts a broader range of investors to the commercial mortgage market. This value creation effect allows loans intended for securitization to be aggressively priced, benefiting Borrowers.

THINGS TO BE CONSIDERED BEFORCE CLOSING A CONDUIT LOAN:

Many misconceptions about the CMBS lending still exist among Borrowers , mortgage bankers and brokers. Especially with respect to how loans are serviced once they have been securitized. While basic loan administration for CMBS loans is substantially the same as for portfolio loans, some key differences exist between servicing for CMBS versus portfolio loans. Borrowers should be informed of the rules governing CMBS servicing as well as the mechanics for processing servicing requests. Borrowers need to carefully consider what types of servicing requests they many have over the life of the loan and try to address how these requests will be handled in their loan documentation before the loan closes.

THE POOLING AND SERVICING AGREEMENT:

Once the loan is transferred to a trust and securitized, the loan is serviced in accordance with the applicable loan documents and the Pooling and Servicing Agreement (PSA) for the trust. The PSA governs the allocation and distribution of loan proceeds and losses to the bondholders. It also describes in detail how the loans are to be serviced and includes guidance to ensure that the trust continues to comply with the REMIC provisions of the tax code in order for the trust to maintain favorable tax treatment. A key difference between traditional portfolio loans and CMBS loans is that, while each portfolio lender will apply his own individualized standards, CMBS services administer loans in accordance with PSAs which generally standardize practices and procedures to meet REMIC requirements and to protect the bondholders. Examples of REMIC restrictions relative to CMBS loan servicing requests are provided in more detail later.

All CMBS servicers (primary, master and special) are required to act in accordance with the “servicing standard” as defined in the applicable PSA. Although the definitions may vary slightly from deal to deal, the same standard usually requires the servicer to use the same care, skill and diligence as it uses to service and administer comparable mortgage loans on behalf of third parties or on behalf of itself, whichever is the higher standard. Due consideration is given to customary and usual standards of practice utilized by institutional commercial mortgage lenders or servicers under comparable circumstances.

CMBS INDUSTRY PARTICPANTS:

The following parties are typically involved with a loan once it has been securitized:

Primary or Sub-Servicer
Master Servicer
Special Servicer
Directing Certificateholder/ Controlling Class/ B-Piece Buyer
Trustee
Rating Agency(ies)
PRIMARY OR SUB-SERVICER:

In some cases the Borrower may deal with a Primary Servicer that may also be the loan originator or Mortgage Banker who sourced the loan. The Primary Servicer maintains the direct Borrower contact, and the Master Servicer may sub-contract certain loan administration duties to the Primary or Sub-Servicer. The Master Servicer remains responsible to the trust for the Primary Servicer’s performance and actions. While Master Servicers maintains all of the responsibilities and duties to the trust under the PSA, a sub-servicing agreement between Master Servicer and Primary Servicer typically mirrors the servicing provisions under the PSA so that the Primary Servicer’s discretion is fairly limited and subject to the same servicing standard as the Master Servicer. Given their role in the origination of the loan, the originator or Mortgage Banker’s involvement as a Sub-Servicer allows for Borrower relationships to be maintained while adding to the collective servicing knowledge about the loan.

MASTER SERVICER:

The Master Servicer’s responsibility is to service the loans in the pool through maturity unless the Borrower defaults. The Master Servicer manages the flow of payment and the information and is responsible for the ongoing interaction with the performing Borrower. The Master Servicer is responsible for collecting the payments from the Borrower, holding and making any disbursements from escrows and performing most routine loan administration functions. The Master Servicer is also responsible for collection and analyzing rent rolls, operating statements and other financial and property information from the Borrower, as well as conducting periodic physical inspections. A Primary Servicer may perform many of these responsibilities to the extent a sub-servicing arrangement is in place.

The Master Servicer is generally required to process all Borrower requests related to consents, waivers, and modifications related to performing loans. The Master Servicer’s ability to waive, consent or modify terms of any mortgage loan is governed by the PSA. Many material servicing requests or modifications will also require the consent or approval of the Special Servicer. In some cases those decisions are further subject to approval by the Directing Certificateholder or review by Rating Agencies as described later.

SPECIAL SERVICER:

Upon the occurrence of certain specified events, primarily a default, the administration of the loan is transferred to the Special Servicer. A Borrower will receive notification from the Master or Special Servicer if its loan has been transferred to Special Servicing. Besides handling defaulted loans, the Special Servicer also has approval authority over material servicing actions, such as loan assumptions.

The Special Servicer is a specialist in dealing with defaulted mortgage loans and is usually selected by the Directing Certificateholder. In many cases the Special Servicer is a related entity to the Directing Certificateholder. Like Master Servicer, the Special Servicer has a duty to the trust and is subject to the serving standard. The standard usually mandates that the Special Server must act to maximize the recovery on the mortgage loan to the bondholders (as a collective whole) based on an analysis of collection alternatives using a net present value methodology. The Special Servicer will consider multiple alternatives as part of its analysis including loan modification, foreclosure, deed-in-lieu, negotiated payoff or sale of the defaulted loan. Frequently the Directing Certificateholder also has the ability to direct the Special Servicer’s actions with respect to defaulted loans. Provided the servicing standard is maintained.

DIRECTING CERTIFICATEHOLDER / CONTROLLING CLASS / B-PIECE BUYER:

The investor in the most subordinate bond classes is commonly referred to as the “B-Piece Buyer.”
B-Piece Buyers generally purchase the B-Rated and BB/Ba-rated bond classes along with the unrated class. The most subordinate bond class outstanding at any given point is considered to be the Directing Certificatehilder, also referred to as the Controlling Class. Given that losses come out of the lowest rated bonds, the PSA provides the Directing Certificateholder the opportunity to play an active role in monitoring the performance of each loan, make decisions on key asset issues and appoint and/or terminate the Special Servicer.

TRUSTEE:

The Trustee’s primary role is to hold all the loan documents and distribute payments received from the Master Servicer to the bondholders. Although the Trustee is typically given broad authority with respect to certain aspects of the loan under the PSA, the Trustee typically delegates its authority to either the Special Servicer or the Master Servicer. As holder of the loans, the Trustee will be named in enforcement actions related to the loans (such as lawsuits or non-judicial foreclosure actions) yet in most instances the Trustee is acting by and through either the Master Servicer of the Special Servicer. All Borrower interaction rarely, if ever, interacts with the Trustee.

RATING AGENCY(IES):

There will be as few as one and as many as four Rating Agencies involved in rating a securitization. Rating agencies establish bond ratings for each bond class at the time the securitization is closed. They also monitor the pool’s performance and update ratings for investors based on performance, delinquency and potential loss events affecting the loans within the trust.

The bond ratings assigned at the time the securitization closes assume that the credit quality of the loan pool will not change significantly over time. As such, some decisions cannot be made without respect to the loans in a securitized pool without rating agency confirmation that such actions will not cause a downgrade of any of the bond class ratings. Rating Agency confirmation is frequently required with respect to actions on the largest loan in the trust, but certain items such as approval of subordinate financing may also require Rating Agency confirmation regardless if the size of the loan. The Rating Agencies will work directly with a servicer in processing these types of requests and will not interact directly with the Borrower.

CMBS SERVICING
Who to Contact:

Borrowers should always initiate their requests with the Primary or Master Servicer, as they know who the players are in the securitization, what the process is, what information is needed for the specific request and whose consent is required. Even if the request must ultimately be approved by the Special Servicer or Directing Certificateholder, there parties will still generally look to the Primary or Master Servicer for a recommendation. It is common practice for servicers to send an introductory letter to the Borrower at the time a loan is closed or securitized, which typically includes a contact address. In the event such correspondence is not available, Borrowers should review their monthly billing statement to locate the identity of the Primary or Master Servicer for their loans and obtain contact information.

COMMON BORROWER REQUESTS:

Just as portfolio lenders service loans to protect their interests, CMBS servicers will act to protect the interests of the certificateholders as a whole. Unlike portfolio loans, where serving decisions are guided by the leaders’ own internal policies, CMBS servicers’ discretion in servicing loans is governed by the PSA and, in some instances, restricted by the REMIC regime.

Complying with REMIC regulations is central to most CMBS transactions to maintain the trust’s favorable tax treatment. One of the primary restrictions imposed upon the trust by the REMIC regime is the requirement that the loan constitute a “static pool.” This means that substitution of collateral cannot occur nor can the loan be materially modified unless specifically provided for in the loan documents or unless the loan has defaulted or default is deemed imminent. Many Borrowers offer good solutions to problems that are, however, not permissible under REMIC regulations and are frustrated when the CMBS servicer must reject their request. Even so, the requirements the REMIC tax regime has on CMBS servicing are limited and, in large measure, can be ameliorated by advanced planning. It is, consequently, extremely important at the loan origination stage to think through, in advance, the needs of the property over the life of the loan and what features and flexibility should be specifically spelled out in the loan documents at origination. This will help avoid a possible REMIC restriction and provide the servicer with clear direction as to how requests are to be handled.

The list below sets forth examples of activities that are prohibited or permissible under REMIC rules.

REMIC Prohibition *

Defease the loan within 2 years of the securitization date
Change interest and amortization payments
REMIC Permissible ** (with advanced planning only)

Release a material portion of or expand the collateral
Substitute collateral
Uncross loans
Change escrow payments
Release lease termination payments to the Borrower
REMIC Permissible *** (but loan or servicing documents may still restrict)

Prepay the loan during a lockout period
Waive or reduce a prepayment premium
Allow secondary financing
Release a guarantor of non-recourse carveouts
Modify existing casualty/condemnation proceeds distributions
Allow an assumption of the loan pursuant to the loan documents
Allow an assumption of the loan not pursuant to the loan documents
Modify Borrower reporting requirements
Release escrows
Release casualty or condemnation proceeds pursuant to docs
* Actions prohibited under REMIC regime, regardless of language in the underlying documents

** Actions permissible under REMIC regime, provided specifically set forth for in the loan documents

*** Actions permissible under REMIC regime regardless of whether provided for in the loan or servicing documents or the PSA. If addressed in the loan documents, Servicers will generally follow the loan documents when deciding how to act upon Borrower request.

PREPAYMENT AND DEFEASANCE:

CMBS bonds are generally called protected. Call protection is an attractive feature of CMBS to many bond investors and implies that the underlying CMBS loans cannot be prepaid without some form of compensating payment being made to enable investors to maintain their expected yield. Bond investors are willing to accept tighter yields on CMBS because of the call protection. This results in more aggressive pricing to Borrowers. Call protection in CMBS is achieved through either defeasance of some form of prepayment calculation.

The form of call protection unique to CMBS loans is defeasance. Defeasance is the substitution of government securities for the property of collateral. A Borrower desiring to obtain a release of its property from the trust may purchase and pledge to the trust a collection of government securities that are specifically selected to generate sufficient cash to make all monthly payments due on the loan through and including any balloon payment due on the maturity date. Defeasance is not prepayment. Technically the note remains outstanding, but is repaid from cash flow from the government securities purchased rather than through cash flow generated by a property. The property is released to the Borrower free from the mortgage lien. In an interest rate environment higher than the loan coupon, a Borrower may even be able to defease for legal, accounting and rating agency fees. Defeasance is prohibited for at least the first two years following securitization due to REMIC prohibitions on substitution of collateral.

Prepayments differ from defeasance in that the note is actually paid off and removed from the trust. Prepayments are frequently accompanied by the payment of a sum of money designed to compensate investors for the loss of yield. This is often referred to as yield maintenance. Yield maintenance is a present value calculation that enables investors to reinvest the loan payoff proceeds at then current treasury yields through the original loan maturity and maintain the same yield as if the loan had not paid off early. Yield maintenance should not be viewed as a “windfall” to the trust as it only allows investors to maintain their expected yield bond classes. The amount of yield maintenance at any point in time depends on the level of current treasury yields relative to the loan coupon. The lower treasury rates are relative to the loan coupon, the greater yield maintenance amount. Prepayments at par are frequently allowed in many CMBS loans near the end of the loan term, commonly the last 3-6 months. More flexible prepayment terms are, however, available on floating rate CMBS than on fixed rate CMBS.

Each Borrower should carefully consider whether prepayment of defeasance is its right course of action, especially considering the potential fees involved. In certain higher interest rate environments, defeasance may provide a less expensive option for the Borrower to release the property from the trust. The out-of-pocket costs associated with defeasance, however, may make defeasance a more costly alternative for smaller loans or in a stable to lower interest rate environment.

Email me to discuss your Commercial Financing Options at: ejortiz@pacificdl.com

Takeout Loans

A permanent loan is simply a long term first mortgage on a multi-family or commercial property. You own an office building. Your existing first mortgage is ballooning. You simply need a new permanent loan.

Any first mortgage loan on a commercial property with a term of at least 5 years is considered to be a permanent loan, even though it has a balloon payment. A 10 year term is about as long of a term as most commercial mortgage lenders will go.

Permanent loans are usually amortized over 25 years, unless the property is older. A lender might amortize a permanent loan on a 35 year old building over just 20 years, with a balloon payment after 5 or 10 years.

A takeout loan is simply a permanent loan that pays off a construction loan.

It’s that simple. You build an office building with an uncovered construction loan; i.e., the lender does not require a forward takeout commitment. The building is completed. You shop around, now that the property is completed (standing) and leased, and you find a conduit that will give you a takeout loan to pay off your commercial construction lender.

Do not confuse a takeout loan with a forward takeout commitment. A forward takeout commitment is just a very expensive letter that promises to deliver a takeout loan in the future if the property is built according to plans and specifications and leased at the target rental rate. The typical forward takeout commitment will cost a developer one to two points, plus at least one additional point if the loan every funds.

There is so much construction money available today that very few commercial construction lenders require forward takeout commitments anymore. And when the project is completed, there are hundreds of hungry lenders who will give a developer a takeout loan to pay off his construction loan.

Feel free to email us at: ejortiz@pacificdl.com to discuss your Commercial financing options.

Acquisition & Development Loans

A land development loan is an advance of funds, secured by a mortgage, to finance the making, installing, or constructing of the improvements necessary to convert raw land into construction-ready building sites. In other words, a land development loan takes an unimproved parcel and breaks it up into a number of smaller, improved parcels upon which homes or commercial buildings will be constructed.

The kinds of improvements we’re talking about might be subdividing, leveling, grading, building roads and bringing sewer, water and power to the site. These kinds of improvements are also known as horizontal improvements. A land developer might may, “I need $1 million for the horizontal improvements.”

An acquisition and development loan (A&D loan) is a loan where a part of the proceeds are used to buy the property. The total project cost would include the cost of the land, the hard costs for the horizontal improvements, the soft costs (including an interest reserve and sales commissions) and a contingency reserve. The minimum cash contribution of a developer on an A&D loan is usually 25% of the total land development project cost.

As a general rule, the minimum cash down payment required for a land developer to purchase a piece of land is 30%. Please note that while many hard money lenders will not exceed 25% to 50% loan-to-value when refinancing a piece of land, many reasonable hard money lenders will finance up to 70% of the purchase price of the land, if the developer is putting down 30% in cash.

If anything other than cash is used as the down payment, like a seller-carried second mortgage or some “credit” for work already done, the size of the loan that the typical hard money lender will make will fall precipitously, probably down to the 55% LTV range. The 30% down payment must be in cash.

Land lenders will look carefully at the migratory patterns of the state. The population of the United States is on the move to warmer climates. The Southeast is enjoying a huge inflow of legal immigrants, especially North Carolina, South Carolina, Florida, Alabama, and Georgia. California is still a preferred state for many lenders, but it is actually suffering from a net outwards legal migration. Arizona, Nevada, Idaho are enjoying a large net inward legal migration, and Utah is still a popular destination.

The states of the cold Rust belt are certainly not great locations for land loans. Land lenders will usually scale back their loan-to-value ratios in Michigan (very depressed), North Dakota, Illinois, Indiana, Ohio, Pennsylvania, New York and New Jersey. Folks are moving out of these states in droves.

When underwriting a land development loan, the underwriter will look carefully at where the property is located in the entitlement process. If the land is zoned agricultural, and the nearby town is anti-growth, a reasonable loan-to-value ratio for a land loan might be just 10% to 25%. If the nearby town is pro-growth and the subject property is located close to the town and in the path of growth, a reasonable loan-to-value ratio might be as much as 40% to 50%, even if the zoning is still agricultural.

A parcel that already enjoys a tentative map for a residential subdivision might be eligible for a refinance in the range of 50% to 60% of value, especially if the current property owner got the property up-zoned. Be careful, however, of the property that is “just a few weeks” from a tentative map. That “few weeks” could easily extend into a “few decades” if the local Board of Supervisors votes against the map.

One of the first things a lender will want to know is, “What is the exit strategy? How are we going to get paid off?” If the borrower is just living off the cash he can pull out of the land until some unlucky hard money lender becomes the biggest fool, the loan is not one many lenders will chase. But if the land developer is an old pro and has a plan to develop three commercial pads and a condo project pad, each of which he will sell off, a land lender will be much more aggressive.

Contact us to discuss your Land Acquisition & Development financing options. Email us at: ejortiz@pacificdl.com

Land Loans

It makes a huge difference whether your land loan request is a purchase money request or a refinance. For example, if an experienced developer is buying the land for his next project, there are banks and hard money land lenders who will finance up to 70% of the purchase price of the land.

The thinking behind such a high-leveraged land loan is that (1) the value of the land has been established in the open market as opposed to by a highly-questionable appraisal; (2) the developer is putting cold, hard cash down (no second mortgages would be allowed in this scenario); (3) the development of the land will serve as the exit strategy for the lender; and (4) experienced developer will be adding value by either improving the zoning or by adding horizontal improvements (bringing utilities to the site, installing streets, gutters, etc.).

On the other hand, if the land loan is a refinance, land lenders will typically underwrite the deal much more conservatively. Loan-to-value ratios on land loan refinances typically are limited to just 40% to 55% LTV. Fifty percent loan-to-value is a very common ceiling for land loans.

If the proceeds of the land loan, however, will be used to add value to the land, then the typical land lender can often be much more aggressive. Suppose you own a $1 million piece of land and you want to borrow $700,000 against it to bring utilities to the site, the land lender will probably use the improved value of the land in his loan-to-value calculation.

But the deal that is tough is the guy who pays $200,000 for a piece of land and through mere luck watches his land increase in value to $500,000. If he wants to pull out more than $250,000 to pay off his credit cards and personal debts, and he personally has done little to increase the property’s value (he didn’t help get the property up-zoned, for example), he will find some resistance from many land lenders.

Feel free to contact us to discuss your land purchasing or refinancing transactions at: ejortiz@pacificdl.com

Hard Money Loans

If you own a commercial property, but either your company is losing money or your credit is poor, you can still easily obtain a commercial loan from a hard money lender.

Hard money lenders make the riskier commercial loans, the deals the banks won’t touch. As a result, hard money commercial loans are more expensive than bank loans. Where a bank might finance a commercial property at 7.5% and one point, the typical hard money commercial lender will charge in the neighborhood of 11% to 13% and three points. (The sister company of C-Loans, Inc. is Blackburne & Brown, and we are far, far cheaper than the typical hard money rates shown above.)

Hard money commercial lenders look primarily to the property as their source of repayment. If the borrower doesn’t make his payments, the hard money lender will simply foreclose and sell the collateral; but no one really wants to own your commercial property.

The typical hard money commercial loan is a short term loan. One year hard money loans are common, but you should be able to negotiate a loan term of at least three years in today’s market. There is a ton of money chasing good hard money deals these days.

As you shop for a commercial hard money loan, be sure to watch out for exit fees and prepayment penalties. An exit fee is a big fee that some hard money lenders charge when the loan is paid off, regardless of whether the loan is paid off early, on time, or late.

You should also watch out for large late fees on the balloon payment. Well in excess of 70% of the time, short term hard money loans are paid off late. Many hard money lenders try to tack on a huge late charge on a late balloon payment, sometimes as large as ten points! In contrast, Blackburne & Brown merely raises its interest rate by 3% after maturity. Since we’re earning a fine interest rate at that point, we are usually quite content to work with a borrower who procrastinated before applying for his permanent loan.

Many hard money commercial lenders win business based on speed. It is sometimes possible to close a hard money deal in as short as ten days. This type of fast, short term, expensive financing (when compared to a bank loan) is known as a bridge loan.

Other hard money commercial lenders specialize in value-added deals. A value-added deal is where the developer buys an existing property and improves it with the proceeds of the loan. A developer might buy raw land and get the property up-zoned. He might buy an empty retail center, upgrade it, find tenants and install the new tenant improvements. Bridge loans are perfect for this situation because bridge loans rarely have prepayment penalties or lock-out clauses. When the developer is finished with his improvements, he can then either sell the property or refinance it to pull out his profit.

Commercial hard money lenders get their lendable funds from two different sources. One type syndicates a new group of private investors for each deal. The other type of hard money lender are companies that have big mortgage funds, similar to mutual funds, already assembled. As a result, these hard money lenders are usually faster.

If you or your company is in need for a Hard Money Loan, Feel free to contact me at: ejortiz@pacificdl.com

Construction Loans

Here is how your apartment construction loan or your commercial construction loan will be underwritten. The first test is the Profit Test. Will your finished project be worth more than it will cost to construct?

A related test is the Loan-to-Value Ratio. After the project is completed and, say, your strip center is occupied, will the construction loan be less than, say, 75% loan-to-value.

Some of our construction lenders are so hungry for deals that they might even allow 80% loan-to-value. But if you still need more equity, it may be possible for you to obtain a mezzanine loan.

Apartment construction lenders and commercial construction lenders often will not trust the appraisal. Instead, they will look to the Loan-to-Cost Ratio. What percentage of the total cost is the construction lender being asked to cover?

Historically developers were asked to cover at least 20% of the total cost of the project, usually in the form of free and clear land. After all, the coonstruction lender wants the developer to have some skin in the game.

Modernly, however, apartment construction loans or commercial construction loans up to 90% of cost, or more, are possible. And if the developer needs even more leverage, a mezzanine loan is sometimes possible.

Will the apartment construction lender or commercial construction lender be able to get out of the deal? If you build your strip center, will the center make enough money to qualify for a takeout loan large enough to pay off the construction loan?

To determine if the takeout loan is large enough to pay off the apartment construction loan or the commercial construction loan, the construction lender will compute the Debt Service Coverage Ratio. The ratio must usually be larger than 1.25. In other words, the net income from the project must be 25% larger than the proposed payments.

Finally the apartment construction lender or commercial construction lender will look to the developer’s Net-Worth-to-Loan-Size Ratio. Generally the developer’s net worth should be at least as large the loan amount.

Pacific Direct Lending has a wide array of Construction & Hard money lenders to fit your current financing needs. contact us today so that we can get started. Email me at: ejortiz@pacificdl.com

Mezzaninne Loans

Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate.

If the company (usually a LLC) fails to make the payments, the mezzanine lender can foreclose on the stock in a matter of a few weeks, as opposed to the 18 months it often takes to foreclose a mortgage in many states. If you own the company that owns the property, you control the property.

We have had Hard money lenders foreclose a mortgage, and it took almost two years. In contrast, a mezzanine loan is secured by the stock of a company, which is personal property and can be seized much faster.

Mezzanine loans are also fairly big. It is hard too find a mezzanine lender who will slug through all of the required paperwork for a loan of less than $2 million. It is occasionally possible to obtain mezzanine loans as small as $1 million.

In addition, mezzanine lenders typically want big projects. If the property you are trying to finance is not worth close to $10 million, you may have a hard time attracting the interest of any mezzanine lenders.

There are three typical uses for a mezzanine loan. Suppose the owner of a $10 million shopping center has a $5 million first mortgage from a conduit. The owner wants to pull out some equity, but he cannot simply refinance the shopping center because the first mortgage has either a lock-out clause or a huge defeasance prepayment penalty. In this instance, he could probably obtain a $2.5 million mezzanine loan to free up some cash.

Suppose an experienced office building investor wanted to buy a partially-vacant office building in a fine location. Once again, assume that the purchase price is $10 million (when the office building is still partially-vacant) and that the conduit first mortgage is $5 million.

This may surprise you, but the right mezzanine lender might be willing to lend a whopping $4 million! But isn’t that 90% loan-to-value? Yes, but when the vacant space is rented – remember, our buyer is a pro – the property will increase to $12 million in value. Suddenly the mezzanine lender is back to 75% loan-to-value and his rationale is obvious. This kind of deal is called a value-added deal.

The third and final use of mezzanine loans is for new construction. Suppose a developer wanted to build a 400 room hotel across the street from Disneyland. Hotels today are out of favor, and a commercial construction lender might only be willing to make a loan of 60% loan-to-cost. If the total cost was $20 million, the developer would ordinarily have to come up with 40% of $20 million or $8 million. That’s a lot of dough.

A $3 million mezzanine loan solves the developer’s problem. The commercial construction lender would advance $12 million, the mezzanine lender would make a $3 million mezzanine loan, and the developer would “only” have to come up with $5 million.

There are about 150 mezzanine lenders active in the country today. Contact us to discuss your situation so that we can help you find the best option for your specific needs. Email me at: ejortiz@pacificdl.com