Bay Area Capital Commercial

Commercial loans with minor rehab component

I believe it is common knowledge to most experienced real estate investors that there are many very good  opportunities for investment in our current market. Of course, many of these properties have deferred maintenance issues, repair issues, and units off-line or in non-rentable condition.

Because of these needed repair items, many of these investment properties have issues with vacancy. High vacancy of course is a drag on net operating income; and low NOI means that debt service coverage (DSCR) is performing at a ratio less than what we would see after the property is rehabbed, repaired, and leased up to its full capacity.

Most commercial loans are based upon the "current" (pre-repair) DSCR and NOI. This means, of course, as an investor that you need to go into the purchase with a big down payment (based on the value of the property before repairs), and then have enough extra cash to cover the repairs with no help from the bank - using your own cash reserves.

When you are done with the repairs and have completed your lease up, you will enjoy the benefits of better cash flow, from the stronger operating income, but generally your loan does not change in any way. This means that your cash invested as a percentage of the property's new and higher value (because of its improved income and occupancy) can be way out of proportion to current lending standards.

Let's look at an example. You buy a building for $1,000,000 that is under-performing due to needed repairs. Because it is under-performing, you can only get a loan for $600,000 - so you have a $400,000 down payment. Now you spend another $200,000 on repairs. After lease-up, the building is performing much better, but your loan is still just $600,000 and you have a total of $600,000 cash invested.

If the building you bought for $1,000,000 is now worth $1,500,000; you have a loan in effect that is about 40% of the new property value, $600,000 in cash tied up in the property and $500,000 in "new equity". This is poor leverage and poor use of capital. Getting a second loan is very difficult - so what is the answer?

Our new lite-rehab product may be the answer. Our lender will create a loan for you that is based in part on the after repair value. At close of escrow, you will be advanced a portion of this loan as purchase money ($600,000) plus another $200,000 for repairs, (after a builder break down of costs is reviewed) but then, after repairs are completed, you will essentially be "reimbursed" for a portion of the repair costs. The lender does this by having more funds released from the primary loan. Similar in concept to a "hold-back" this loan (when all funds are fully extended) will leave you with more cash in your pocket, and a more appropriately sized commercial loan.

In the above example, the lender might advance $600,000 at close of escrow, another $200,000 for repairs, and another $200,000 after lease up; creating an eventual loan for $900,000 which is 60% of the new value of $1,500,000.

This is available west coast only.

  • Bank rates, can adjust by location and condition
  • 25 and 30 year amortization
  • 5 and 7 year terms
  • Loan sizes $700,000 and higher
  • Usually 1 point
  • Must be cash flowing property
  • no ground up construction
  • Re-positioned property OK (convert from retail to apartment for example)
  • Requires strong resume and decent financials


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