Commercial Financing 101

Commercial Financing can be broken down into a number of categories, but let’s start with two broad categories: Owner-User (owner-occupied) and Investment Financing.

Owner-User:

The owner -user category is dominated by SBA loans and we cover them in depth under the SBA tab. There are also a number of “SBA Look-Alike” loans available in the marketplace and these loans strive to fill the same purpose as SBA loans, and compete by differentiating themselves from SBA programs in one or more of the following manners: 1) less stringent underwriting requirements (not lately!) 2) less stringent application process (SBA=paperwork) 3) less stringent ongoing reporting burden, etc.  The compromise is that generally these programs will carry one or more of the following attributes: higher interest rate, higher fees, more onerous prepayment penalties, shorter terms, etc. That being said, markets are in constant flux and you never know when a lender will decide to get aggressive so if you are interested in an owner-user loan, rest assured that we know about it and will always advise you of your options.

Investment:

This is a “catch-all” category for any loan that has as its main purpose, to provide capital for a real estate investment. A real estate investment can be defined as follows: Any implementation of capital or effort into real property with the expectation of a return on (not to forget the return of) the investment via either periodic cash flows or appreciation realized at the sale of the investment property or a combination of both.

Real Estate Investment takes on many forms, but most often an investor is looking for cash flow from rental real estate:

Rental Real Estate: often these investments don’t depend on future appreciation (but they hope for it!) or any great effort, creativity or risk on the part of the investor to increase the value of the property. Simply purchase and operate. These investments being lower risk, usually carry lower returns. Many types of properties can fill this investment need:

1. Single family homes and 1-4 unit properties
2. Multi-family (apartment properties with 5 units or more)
3. Office
4. Retail
5. Industrial
6. Warehouse

Of course all of these property types can be purchased with the intent of increasing the value of the property via effort, creativity and risk (key phrases you may hear are value- add, re-position, re-habilitate, re-tenant, re-develop) . You should expect both higher risk and a higher return.

The above categories can be broken down in other ways as well such as: Multi-tenant vs single-tenant, Triple-Net vs. full service, and many more.

Other Real Estate Investment Vehicles:

1. Land investment: Land investments may be purely speculative (land banking) or depend on increasing the value through effort, creativity, and risk, by developing the land, i.e., changing the entitlement characteristics, dividing it into smaller parcels, improving the property with streets, curbs, utilities, etc.
2. Development: Real Estate development depends more than any other category on the effort, creativity, and risk of the investors, and therefore should carry the highest returns.
3. Mortgage note investment. This is a very passive form of investment activity that can take on a wide spectrum of risk and return characteristics, but generally strives to be lower risk than the equity portion of the investment. The investor desires a fixed rate of return during the term of the investment and the return of their investment at maturity of the note.

If you are interesting in learning more about opportunites in commercial real estate investment, please call ud at 510-999-0539 for an in-depth discussion of your goals.