How to get more than the typical leverage for a commercial real estate deal, including the true 100% LTC loan.
If you want to buy a home, the typical down payment is 20% of the purchase price. The typical minimum you can put down is 3.5% and that is by getting approved for an FHA loan. The only way to get 100% long-term financing for a 1–4 unit property is through a VA loan (you need to be a veteran to qualify).
Now what if you wanted to get 100% financing for a commercial property? (5+ unit apartments, retail, office, industrial, hotel, etc.)
There are a couple of lending products that get you very close and a couple that actually provide it.
First, the lending solutions that get close to 100% Loan-to-Cost (LTC)…
Small business owners can get up to 90% LTC for properties that their business will occupy.
For example, let’s pretend that you own an import/export business that buys retail goods from overseas and sells them domestically. You want to purchase an industrial warehouse for $10,000,000 to hold inventory and perform shipping. The federal government’s Small Business Administration (SBA) provides two products, the SBA 504 and 7a, that allow up to 90% long-term financing. Your business could borrow up to $9,000,000 for 25 or 30 years at very low rates (between 2.5% and 4.5%). Plus, you can roll the closing costs into the loan amount.
The next lending solution that gets close to 100% LTC is specifically for 1–4 unit “fix and flip” business plans.
Fix and Flip loans help investors buy the property, quickly renovate, and put the property back on the market to sell.
It is usually either private capital or debt fund lenders that lend on these projects. They typically cover between 80–90% of purchase price PLUS 100% of all rehab costs thereafter. Rates are typically around 8–10% for the 6–18 month term.
These lenders get so aggressive because the housing market is hot, and it’s relatively simple to determine the as-stabilized (for-sale) value once completed. The secondary constraint is usually 70–75% of the completed, for-sale value.
So lenders will give the LESSER of 90% of purchase price + 100% of rehab costs OR 75% of for-sale value.
Let’s assume you bought a fixer upper for $500,000 and it would cost you $150,000 in rehab costs. Comparable market sales of similar properties are selling for $1,000,000.
This lender would lend $600,000 (90% of price + 100% of rehab), because it is less than the 75% of for-sale value ($750,000).
For multifamily bridge plays where the loan request is greater than $10 Million, there are lenders that will provide 80% of purchase price plus 100% of rehab costs. There usually needs to be a minimum rehab investment of at least $5,000 per unit in order to justify the value-add play (assuming the money you invested will lead to increased rents and therefore increased stabilized future value).
This is a very similar loan structure to the fix & flip deal above. However, this is for much bigger housing plays and these lenders are a little lighter on initial leverage of the purchase price (80% versus 90% in fix & flips).
Many construction and bridge lenders will only go up to 65%-75% of total costs these days. Another potential solution is sourcing a mezzanine debt lender to provide that extra 15%-20% of gap financing to get the total leverage to 80%-90% of the total costs.
This will not be easy to do because it requires detailed knowledge of the capital markets and sourcing two different lenders (a senior and a mezz) that are willing to work together (the legal discussions to pull this off can get lengthy).
Now time for the lending scenario that can actually provide a full 100% Loan-to-Cost (LTC)…
“A build to suit is a commercial building specifically constructed to meet the design and physical specifications of one particular commercial tenant. The property is typically leased for a predetermined length of time and typically longer term, due to the fact the building is designed specifically for the tenant.” — SimonCRE
Certain lenders are willing to provide up to 100% LTC for build-to-suit industrial, retail, office, and medical office construction deals, usually when there is a credit tenant that has signed a long-term lease commitment. A credit tenant would be a company occupier whose debt obligations have been rated above “credit grade” by one of the major rating agencies.
Loan interest rates are typically between 10–12% with combined origination and exit fees of 2–4%. The lenders can get more comfortable with very experienced developers that have focused business plans. We previously explored Build to Suit underwriting math in this blog post: