Conventional commercial loans are loans that are provided by a bank, credit union, savings institution or other traditional financial institution and are secured by a first lien position on the subject property being financed. The collateral may be any type of commercial real estate and does not always require previous experience. These loans are typically suited for both experienced and inexperienced borrowers, small loan balances, specialty properties, and any other structure that requires a personal guaranty. The borrower must meet minimum credit and liquidity requirements.
Conventional lenders typically have maximum LTVs of 75-80%. Borrowers should expect to have “hard cash” equity invested in purchase transactions, while being able to maintain a post-closing liquidity sufficient to service their debt for several months and an overall net worth equal to or greater that the loan amount (although there may be some flexibility). Properties will need to be able to meet a DSCR of 1.25-1.55x (depending on the LTV and property type) at the underwritten rate.
Term Length/Amortization Guidelines
The length of term and amortization depends heavily on the institution providing the funding as well as the property type. Terms vary from 3-15 years with amortizations ranging from 10-30 years. Depending on the way the loan is structured, it may “balloon” at the end of the term, meaning that the loan balance will need to either be refinanced or paid off; otherwise the loan is self-amortizing, meaning the loan is fully paid off when the loan matures, so there in no loan balance to pay off (unless the loan is prepaid before it matures).
A conventional loan may or may not be assumable. Typically assumption occurs when the borrower wants to sell the commercial real estate that secures the loan, and the purchaser of the property wants to take the loan over. Once the property sale and assumption is completed, the purchaser becomes the owner of the property and is bound by the original terms of the assumed loan and the original borrower/seller is released from its obligation to the property and the existing loan. The benefit of this structure is that the assumption of the loan allows the borrower/seller to avoid pre-payment costs and give the buyer the opportunity to assume a loan that may have favorable terms that what is market. Loan assumption is an especially attractive option in high interest rate environments or tight credit environments.
Prepayment Penalty Structures
Prepayment penalty structures vary greatly depending on the institution funding the transaction. It may be structured as Yield Maintenance, Declining (step-down) or Flat prepayment penalty, or may be structured to suit a construction or mini-perm loan.
Yield Maintenance:The goal of Yield Maintenance is to allow the bond investors to maintain the same yield as if the borrower made all scheduled mortgage payments until maturity. The penalty is typically calculated by a formula contained in the Note of the loan documents. The language may vary between different institutions, but will typically have the same two amounts to be repaid, namely: 1) The loan’s unpaid principal balance and 2) a prepayment penalty, which is typically determined by calculating the difference between the loan’s interest rate and the replacement rate (based on US Treasury or other index that most closely corresponds to the maturity date), with the remaining loan payments discounted back for the time value of money. One thing to keep in mind is that yield maintenance provisions usually contain a prepayment penalty “floor” of at least 1% and allow for repayment without penalty in the last 3-6 months of the loan.
Declining (Step-Down) Prepayment Penalty: A declining prepayment penalty may be structured in a variety of ways, but always has the same feature of the prepayment penalty lessening by 1% per step with the last 3-12 (or more) months open to prepay or refinance without penalty. These are usually offered on shorter-term loans (3-10 years), but could also potentially be offered on longer terms as well. An example of a 5 year declining prepayment penalty would be as following:
5% of the loan amount if prepaid in the first year
4% if prepaid in the second year
3% if prepaid in the third year
2% if prepaid in the fourth year
1% if prepaid in the fifth year
Also represented as 5-4-3-2-1%.
Flat or Straight Prepayment Penalty: This penalty is a fixed percentage over the length of the fixed term or a fixed percentage for a number of years during the term. For example, on a five year fixed term loan, the penalty might be 3% of the loan amount during the five year fixed term or 3% during the first three years.
Conventional loans may be non-recourse, limited recourse or full recourse loans. If it is non-recourse, the borrowers are not personally liable for the repayment of the loan and that the collateralized property and its cash flows would be the sole source of repayment of the debt in the event of a default or foreclosure. However, in the event the borrower actively participates in an activity that could cause harm to the property, they could be springing recourse in some limited circumstances; this may include loan fraud, property transfer or subordinate financing without consent of the lender and voluntary or collusive activity leading to a bankruptcy filing, among other such actions. Limited recourse loans makes the sponsors guarantying the loan responsible for a percentage of any shortfall between the loan balance and sales price in the event of default and foreclosure, where the property must be auctioned off as well as any applicable legal and ancillary fees. The carve outs for the non-recourse loans would also apply. Full recourse loans make the sponsors guarantying the loan responsible for any and all shortfalls between the loan balance and sales price in the event of default and foreclosure as well as any applicable legal and ancillary fees.
Navigating the different loan programs and their many options requires knowledge and expertise. First Commercial Funding Corp. has the knowledge, expertise and strategic relationships required to provide you with the most competitive rates and terms for your commercial or multifamily property.
To submit a property for consideration, please fill out our excel-based commercial loan application in the forms section of this website. We’ll use our underwriting software to qualify the project and see if it meets one of our programs’ guidelines. And we’ll do all this without any upfront cost to you.
Below you will find a general outline of the lending perimeters for our conventional commercial loans. We welcome inquiries not specifically mentioned in the outline.