CONVENTIONAL FINANCING

What Are Conventional Commercial Loans?

Conventional commercial loans are mortgages backed by commercial real estate that PHD Financial secures for you from traditional lending institutions such as banks, credit unions, savings and thrift institutions, life insurance companies, hedge funds, pension funds, private financial institutions, etc. These loans are typically secured by a lien position on the subject properties being financed. The collateral may be any type of commercial real estate.

Conventional loans usually have a maximum LTV of 75-80%, while some lenders can stretch up to 85% in limited circumstances, for financially strong transactions. Loan to Value can vary, however, by category.

As an example, for hospitality loans, LTV is typically 65-70%.

As a borrower, you should expect to have “hard cash” equity invested in purchase transactions and be able to maintain post-closing liquidity sufficient to service your debt at the levels dictated by your lending institution’s credit department. Most conventional loans also call for an overall net worth equal to or greater than the loan amount requested.

Your conventional loan transaction will typically need to be able to meet a Debt Service Coverage Ratio between 1.25 and 1.55 times, depending on the program. This ratio is calculated at the underwriting rate dictated by the lender.

  • Term and amortization will depend greatly on the institution providing the funding as well as the property type.
  • Terms usually range from 3-15 years, with amortizations ranging from 10-30 years.
  • Conventional loans may be non-recourse, limited recourse, or full recourse.

A prepayment penalty structure varies greatly depending on the institution funding the transaction. Typical prepayment structures include Yield Maintenance, Declining (or step-down) , flat, or may be specially structured to suit a construction or mini-perm loan.

Conventional Commercial Loan Underwriting Parameters

Conventional Lenders that PHD Financial works with typically have maximum LTVs of 75-80%, while some lenders can stretch up to 85% in limited circumstances for especially strong borrowers. As a borrower, you should expect to have “hard cash” equity invested in purchase transactions, while being able to maintain a post-closing liquidity sufficient to service your debt for several months; and an overall net worth equal to or greater than the loan amount (although there may be some flexibility). Properties will need to be able meet a DSCR (Debt Service Coverage Ratio) of 1.25-1.55x (depending on the LTV and property type) at the underwriting rate.

As with many types of loans, parameters can vary depending on the category of business being financed, and the borrowers’ financial profile.

Term Length/Amortization

The length of term and amortization depends heavily on the institution providing the funding as well as the property type. Terms can vary from 3-15 years with amortizations ranging from 10-30 years. Depending on the way the loan is structured, it may “balloon” at the end of the term, meaning at the loan balance will need to either be refinanced or paid off. Otherwise the loan is self-amortizing, meaning that the loan will be fully paid off when the loan matures, so there is no loan balance to pay off (unless the loan is prepaid before it matures).

Recourse

Conventional loans may be non-recourse, limited recourse or full recourse loans. If it is non-recourse, as a borrower, you are not personally liable for the repayment of the loan and that the collateralized property and its cash flows would be the sole source of repayment of the debt in the event of a default or foreclosure. However, in the event you actively participate in an activity that could cause harm to the property, there could be recourse in some limited circumstances; this may include loan fraud, property transfer or subordinate financing without consent of the lender, and voluntary or collusive activity leading to a bankruptcy filing, among other such actions. Limited recourse loans makes the sponsors guarantying the loan responsible for a percentage of any shortfall between the loan balance and sales price in the event of default and foreclosure, where the property must be auctioned off as well as any applicable legal and ancillary fees. The carve outs for the non-recourse loans would also apply. Full recourse loans make the sponsors guarantying the loan responsible for any, and all, shortfalls between the loan balance and sales price in the event of default and foreclosure as well as any applicable legal and ancillary fees.

Loan Assumption

A conventional loan may or may not be assumable. Typically assumption occurs when the borrower wants to sell the commercial real estate that secures the loan, and the purchaser of the property wants to take over the loan. Once the property sale and assumption is completed, the purchaser becomes the owner of the property and is bound by the original terms of the assumed loan and the original borrower/seller is released from its obligation to the property and the existing loan. The benefit of this structure is that the assumption of the loan allows the borrower/seller to avoid pre-payment costs; and give the buyer the opportunity to assume a loan that may have favorable terms than what is market. Loan assumption is an especially attractive option in high interest rate environments or tight credit environments.