Commercial Mortgage Loans – Borrower Cash Requirements Are Higher Today
The world wide credit crisis is causing sever problems throughout the global economy, particularly in industries that are highly dependent on borrowed money. Commercial real estate is just such an industry; virtually all commercial character is mortgaged to some extent.
Like residential lenders, commercial lenders have tightened up their underwriting standards and become more conservative in their lending decisions. In short; it’s harder to get a commercial mortgage loan today.
One of the first criteria commercial mortgage lenders tweaked is the all-important loan-to-value ratio, or “LTV”. LTV represents how much money will lend to a commercial real estate investor as compared to their assessment of the value of the collateral character.
The commercial mortgage industry never embraced 100% financing the way the residential side of the business did, but LTV ratios did climb during the recent run-up in character values and the corresponding economic expansion. It was not uncommon for buyers of income producing character to succeed in securing financing with only a 10-15% cash investment. LTV ratios of 80% were the norm and lenders allowed fairly large seller carry-backs of 2nd position mortgages or other junior debt. A typical 80% LTV deal might have been structured with a first mortgage of 80% of the similarities value, a mezzanine loan in junior position of 10% and a 10% cash injection from the borrower.
The days of high LTV ratios are miles behind us. Few institutional commercial mortgage lenders will consider lending any more than 75% of any character’s value in this challenging market, and private lenders won’t go over 65% . And further, their CLTV, or combined loan-to-value ratios have also plummeted. This simply method that first position lenders are restricting the allowable amount of second position debt. They simply won’t allow large seller financing or junior debt structures any longer.
The bottom line is that investors, character owners, developers and project sponsors must come up with more of their own cash if they want to close deals today. Stabilized, income producing similarities are able to garner up-to 75% LTV from traditional lenders if the sponsor has a good reputation. Private lenders will only go up to 65%. Non-stable buildings (insufficient cash-flow) have been sworn off by edges and Wall Street. Investors will have trouble finding traditional funding. Private lenders, on-the-other-hand will lend between 50% & 60% LTV on assets that don’t cash-flow. Land is increasingly difficult to fund, traditional lenders are aggressively avoiding it. Private lenders, might lend about 50% of its value if you find one with an appetite for unimproved land.
If you want a commercial mortgage loan in this tight capital market, be prepared to come to the table with plenty of cash.