Everything You Need to Know: a Commercial LoanCommercial Loan

Shopping for a commercial loan with the best interest rate can be a daunting task.  Understanding how rates are determined can help.  When a client calls for a commercial real estate loan they generally start with two questions, what is the interest and what will it costs to close the loan.  The good news is we have many lenders to choose from the bad news these lenders loan products for commercial loans and pricing vary widely.  We work for the property owner, not the lender to place the loan that will best fit the borrower’s goals that the market can offer. If you want to see rates on different product types go to https://caffreyloans.com/current-loan-rates/.  In order to find the best interest rates and terms for a commercial loan for a client, we will need some key information to start the process:

  • What is the property type?
    • Multifamily/Apartments, Affordable, Age restricted
    • Retail, Single tenant, anchored retail, unanchored.
    • Light Industrial, single tenant, multi-tenanted?
    • Self-Storage/Mini Storage
    • Office, single tenant, multi-tenanted
    • Hotels, non-flagged or flagged if flagged which flag?
    • Credit Lease, who is the tenant?
    • Healthcare, nursing home, hospital, type of licensed facility
  • Is the loan request for:
    • Acquisition
    • Refinance with cash out or no cash-out?
    • Short-term bridge loan in order to reposition the property.
  • Are you planning on holding on to the property for many years? Or is the goal to renovate and flip?
  • Is recourse vs non-recourse important?
  • What is the loan amount and what Loan to Value is the borrower looking for?

If you are acquiring a multifamily with leverage to 80% of the purchase price on a non-recourse loan with a low-interest rate for 10-years and a 30-year amortization we might direct you to Freddie Mac or Fannie Mae see current market rates at [https://caffreyloans.com/current-loan-rates/]. If you require more leverage up to 85% and with a low-interest rate along with an even longer amortization to 35-years for existing and construction period plus 40-years for new construction HUD/FHA may be the best option for you [ https://caffreyloans.com/fha-hud-section-223a7].

Each of these lenders has specific underwriting requirements that we usually address in the first conversation.  For example, if the goal is to borrow up to 80% of the purchase price for a Student Housing Complex then none of the lenders above (Fannie Mae, Freddie Mac or HUD) will consider the loan at 80% leverage.  While Freddie and HUD will treat the property type as ineligible Fannie Mae will originate loans on Student Housing.  However, Fannie Mae reduces the amount of funding from 80% loan to value to 75% loan to value if Student Housing.  Furthermore, Fannie will further reduce the loan to value another 5% if cash out is part of the refinance request.

There are many more variables to consider, some apartments have rents below that of the sub-market that might make the property fit into an “affordable” category allowing for a reduction in rates of ¼ of a point.  Our job is to investigate these subtle underwriting matters in order to deliver the lowest interest rate commercial loans for our clients.

Fannie Mae and Freddie Mac both would like to see the principals have prior multifamily ownership and/or apartment management experience.  What if the principals do not have this prior experience?  We can help with ownership structure ideas and/or move to a lender that simply does not have these underwriting conditions.

A lender with less underwriting restrictions is a Conduit or Commercial Mortgage Backed Securities (CMBS) lender.  These lenders often bundle or aggregate hundreds of loans into a Billion Dollar plus loan pool and sell mortgage-backed securities through Wall Street firms.  The loan types are generally, multifamily, retail, light industrial, office, self-storage, hotels and nursing homes.  These lenders generally carry a little higher interest rate than the Government Sponsored Entities (GSE ( Fannie Mae, Freddie Mac HUD/FHA)) they will most often lend up to 75% for all property types and up to 80% for apartments and limited 65% for Hotels with amortizations to 30-years for all property types.  Fannie and Freddie both require a 90% occupancy for the preceding 90-days before closing while Conduit lenders do not.

Outside of the GSE lenders Life Insurance Companies often offer some of the most attractive commercial loan terms however at a lower loan to value and with property ages of generally not more than 10-years old to find the best rates on loans over $5 million.

One of the factors that can play into pricing is the debt service coverage ratio (DSCR).  That is the ratio between the annual underwriting net cash flow anticipated from the property divided by the annual principal and interest payments.  With our extensive loan underwriting experience, we can often increase the DSCR resulting in a reduced interest rate from the lender.

Underwriting Net Cash Flow   =  DSCR
Annual P&I Loan Payments


If the property is not economically stable or if the property owner plans on repositioning the property locking in on a long-term fixed-rate loan might not be available.  Additionally, many of the long-term fixed rates can come with substantial prepayment penalties which we call “handcuffs.” If we know your plans for property ownership is short or if you plan on taking cash out down the road by refinancing after the property is re-positioned we would make sure the loan product offer would work well to fit the owner’s goals and not be saddled with handcuffs.

We have lenders with long-term fixed rates, amortizations to 25-years and no prepayment penalties, the downside is these lenders generally require some form of personal recourse to the owner.
The closing costs vary between lenders.  We can provide early estimates of the closing costs once we have identified the basics of the loan request and know the type of lender most suited for a commercial loan.

This is a long way of saying many variables fit into commercial loans pricing: Loan Amount, Property Type, Borrower Experience, Loan to Value, Loan Term, Amortization, Property History, Occupancy Levels, Underwritten Debt Service Coverage Ratio, Geographic Location, Age of the property, Purpose of the loan, and more.

It is our job to wade through the many underwriting items that can influence the final interest rate.  In the end, our goal will be to present several options that fit well with your objectives.  No two lenders are exactly the same.  We like options and assume our clients do as well.  You go to your local bank they are limited to what loan products they will offer.  If you like options and access to lenders that can offer an array of terms call or email Mike Caffrey today. (913) 402-7077 // [email protected]