Commercial Bridge Funding - Get the Story and Get noticed


Is your loan being noticed or sitting somewhere on the floor of the lender?

Whether seeking debt or equity financing for your project it is important to have a basic understanding of the factors private investors and investment firms use to evaluate risk.

There are many viable projects that never close or fund because the project is simply not presented correctly. In many cases time simply runs out on the would be developer because the seller or the project/land simply moves on to other buyers. Time runs out because of poor planning by the investor or the investor and mortgage broker did not understand how to present the project to the lender. Funding institutions are presented may projects daily. Guess which ones close and are evaluated the quickest. The ones with well written and concise executive summaries.

Below is summary of what the capital source may use to judge the viability of your land development project and what should be included in your summary.

Below I will describe what information should be in the summary and how to get attention.

LOAN REQUEST: ex: We are requesting 3 million for the land acquisition and development of 100 acres of commercial land. purchase price of land is 3 million and development will cost 2 million. We are injecting 2 million cash into the project. Projected value is 9 million of developed land. Our exit strategy is to sell residential lots and commercial lots. Our time frame for completing the project and repaying the loan is 18 months. (be detailed on use of funds)

After writing a clear summary include

1. Principals requesting loan. (include all information so that a LOI (letter of interest can be addressed to appropriate parties. Include resume and any examples of past projects. Complete financials with tax returns and personal financial statements of those standing for the loan.

2. Information about the land should include.


current value, proposed value, current zoning

If land is already owned, be detailed on purchase date and original cost. Include all monies already injected into the project. (very key)

Location is one of the greatest indicators of a property's value and development potential. Most development deals that require funding originate out of rapid-growth markets or areas of transition.

Physical characteristics and topography are also important. A review of engineering reports is another important step in assessing the property. These reports may reveal a situation that must be mitigated or that might increase the land development cost. For example, if the topography is especially steep, land development may be reduced. This could increase the cost to improve the lots or to build the homes. Engineering reports also can determine if a property is in a flood plain.

3. Current executed contract (how much time and flexibility is needed)
4. surveys, plats, topo maps, environmental reports.
5. current appraisal if there is one.

By understanding your deal you should be able to construct clear summaries and be pleasantly surprised by how quickly funders will make decisions. You will start to see that many deals are simply not viable projects. Most deals are turned down due to lack of equity. 100% financing is usually not doable unless the lender takes a very significant equity position.

What Investors Should Know About Commercial Real Estate Loans


Your commercial real estate transaction does not close unless the loan is approved. You can also improve the cash flow if the interest rate for the loan is low. So the more you know about commercial loans the better decision you can make about your commercial real estate investment.

Loan Qualification: Most of you have applied for a residential loan. You provide to the lender with W2’s and/or tax returns. In general the more income you make the higher loan amount you qualify. You could even borrow 100% of the purchase price if your income or stated income is strong. For commercial loan, the amount of loan the lender will approve is based on the rental income of the property, not your personal income. So the more rental income the property generates, i.e. the higher the CAP rate, the higher loan to value (LTV) the lender approves. If you buy a vacant commercial building, you will have difficult time getting a loan as it does not have any rental income unless you plan to occupy it for your business.

Loan to Value: Commercial lenders tend to be more conservative about the loan to value. Most commercial lenders loan up 75% of the value of the property. The following is just a rough guideline for LTV based on the CAP rate as the actual calculation is beyond the scope of this article.


CAP ----- LTV
8% ----- 75%
7% ----- 67%
6% ----- 55%
5% ----- 45%


Lenders will only loan you the amount such that the income after expenses, i.e. net operating income is at least 20-25% more than the annual mortgage payment of the property. Or another words, the loan amount is such that you will have positive cash flow equal to at least 20-25% of the mortgage payment. So if you purchase a property with low CAP rate, you will need more down payment. This is so true for commercial properties in California as the CAP rate is in the 5% range. Commercial real estate is intended for the elite group of investors so there is no such thing as 100% financing.

Interest Rate: The interest for commercial is dependent on various factors


Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.


Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, everyone needs a roof over their head no matter what so the rate is lower for apartment.


Age of the property: loan for newer property will have lower rate than dilapidated one. To the lender the risk factor for older properties is higher so the rate is higher.


Area: if the property is located in a growing area like Atlanta metro the rate would be lower than a similar property located in the rural declining area of Arkansas. This is another reason you should study demographic data of the area before you buy the property.


Your credit history: similarly to residential loan, if you have good credit history, your rate is lower.


The lenders you apply the loan with: Each lender has its own rates. There could be significant difference, e.g. over 1%, in the interest rates. So you should work with someone specialized on commercial loans to shop for the lowest rates.


Prepayment flexibility: If you want to have the flexibility to prepay the loan then you will have to pay higher rate. If you agree to keep the loan for the term of the loan, then the rate could be 1% interest lower. See more on conduit loan.

Prepayment Penalty: In residential loan, prepayment penalty is often an option. If you don’t want it, you pay higher rate. Most commercial loans have prepayment penalty. The prepayment penalty amount is reduced or stepped down every year. For example on a 5 year fixed rate loan, the prepayment penalty for the first year is 5% of the balance. It’s reduced to 4% and then 3%, 2%, 1% for 2nd, 3rd, 4-th and 5-th year respectively.

Loan Fees: In residential mortgage, lenders may offer you a “no points, no costs” option if you pay a higher rate. Such option is not available in commercial mortgage. You will have to pay between � to 1 point loan fee, appraisal cost, environment assessment report fee, and processing/underwriting fee. A lender normally issues to the borrower a Letter of Interest (LOI) if it is interested in lending you the money. The LOI states the loan amount, interest rate, loan term and fees. Once the borrower pays all the fees, the lender starts underwriting the loan. If the lender approves the loan and you do not accept it then the lender keeps all the fees.

Loan Types: While there various commercial loan types, most investors often encounter 3 main types of commercial loans:


Business Administration or SBA loan. This is a government guaranteed loan intended for owner-occupied properties. When you occupy 51% or more of the space in the building (gas station is considered an owner-occupied property), you are qualified for this program. The key benefit is you can borrow up 90% of purchased price.


Portfolio loan. This is the type of commercial loans the lenders loan to you using their own money. Lenders are often more flexible because it’s their money. For example United Commercial, Citi Bank or Cathay Bank is a portfolio lender.


Conduit loan. It’s harder to explain to an average consumer or investor what a conduit loan is. It’s easier identifying it by its characteristics or just simply ask the lender.
The rate is often lower. It is often around 1.2% over the 5 or 10 year US Treasury rates compared to 1.85-3% over the 5 or 10 year US Treasury rates for portfolio loan. This is the key advantage of conduit loan.
Conduit lenders only consider big loan amount, e.g. at least $2M.
Lenders require borrower to form a single-asset entity, e.g. Limited Liability Company (LLC) to take title to the property. This is intended to shield the property from other the borrower’s liabilities.
If the borrower later wants to sell the property before the lock out period expires, the new buyer must assume the loan as the seller can not pay off the loan. This makes it harder to sell the property because the buyer needs to come up with a significant amount of cash for the difference between the purchase price and loan balance. Furthermore, the lender could reject the loan assumption application for various reasons as there are no incentives for it to do so. If you are a 1031-exchange buyer, you may want to think twice about buying a property in which you must assume the loan. Should the lender reject your loan assumption application, you may end up not qualifying for the 1031 exchange and have to send to Uncle Sam a big capital gain check. This is the hidden cost of conduit loan.


Even when you are allowed to prepay the loan, it costs an arm and a leg if you want to prepay the loan. The prepayment penalty is often called Yield Maintenance or Defeasance. Basically you have to pay the difference in interest between the note rate of your loan and the current US Treasury rate for the remaining years of the loan! This amount is often so high that the seller normally requires the buyer to assume the loan. You can compute the defeasance from www.defeasewithease.com website. Besides the defeasance, you also have to pay a hefty processing fee which is in the $50-60K range! These are another hidden cost of conduit loan. Conduit loan may be the loan for you if you intend to keep the loan for the life of the loan that you agree to at the beginning. Otherwise it could be very costly due to its payoff inflexibility.

Lenders Coverage Area: commercial lenders would do business in areas they are familiar with. For example while Green Point Commercial does business in Northern California, it does not cover Fresno or Sacramento County. United Commercial Bank will only consider properties in California. Provident Bank does business in Arizona, California and Nevada. Silver Hill Financial covers all 50 states but has a one million dollar loan limit. Kennedy Funding does business almost anywhere but the rate is pretty high as it is a hard-money lender. GE Commercial Financing will only consider transaction with at least $5M loan.

Lenders Coverage Property Types: Most commercial lenders would only consider a certain types of properties that they are familiar with. For example Washington Mutual would do apartments and office buildings but not retail properties or gas stations. Citibank would not consider loans for single tenant retail properties. Westford Financial specializes on church financing. Comerica concentrates on owner-occupied properties.

Conclusion: Commercial loans are a lot more complex than residential loans. As an investor, you should employ a professional commercial loan broker to assist you with your commercial loan need. Chances are that you will end up paying lower interest rates, avoiding potential pitfalls and having a better chance to get the loan approved.

Commercial Real Estate Jargons Investors Should Know


Commercial real estate investment is a new territory for many real estate investors. The following is the alphabetical list of most commonly used terms in this area.

Anchored tenants: big brand-name national tenants, e.g. Albertsons, Longs Drug, Walmart that bring in lots of traffic to the shopping center.

CAM: Common Area Maintenance. Associated with CAM is CAM fees. For NNN leases, the term CAM fees refer to the money tenants pay landlord to cover property taxes, insurance and maintenance.

Cap rate: Capitalization rate or the ratio of Net Operating Income over purchase price. The higher the cap rate, the higher the rental income in term of percentage. For people who invest in the stock market, cap rate is the inverse of P/E ratio. Cash on cash: annual percentage return of your down payment not including appreciation.

Conduit loan: also called Commercial Mortgage Backed Securities (CMBS) loan often with the lower rate than traditional commercial loan but either has high pre-payment penalty (called defeasance or Yield Maintenance Penalty) or does not have payoff flexibility.

CPD: Car Per Day or traffic volume on a road.

CPI: Consumer Price Index. It's often used to calculate annual rental increase to compensate for inflation.

Due Diligence Period: the duration after acceptance normally 15-30 days to allow buyer to investigate about the property. Buyer can cancel the contract during this time for any reasons and get full refund of the deposit.

Estoppel Certificate: a letter provided and signed by tenant confirming the current rent and terms.

Full-service lease: lease in which tenant pays rent that covers everything including utilities.

Gross income: total annual income before any expenses.

Gross lease: lease in which tenants just pay rent. Landlord pays tax, insurance, & maintenance.

GLA: Gross Leaseable Area or total rentable area. This is the space that can be leased and receive rental income. It does not include spaces for utilities room, elevator, etc.

GRM: Gross Rent Multiplier for apartment. Ratio of purchase price over annual income.

LLC: Limited Liabilities Company. A legal entity many investors formed to own commercial properties.

LOI: Letter of Intent/Interest or the normally non-binding offer letter used to make an offer to buy a commercial property.

MAI appraiser: Member Appraisal Institute commercial appraiser.

Master lease: lease signed by the seller to rent the vacant space to provide rent guarantee.

Mixed Use: commercial properties with retail on 1st floor and apartment on upper floors.

Triple Net (NNN) lease: lease in which tenants pay base rent plus property tax, insurance & CAM fees. Absolute NNN lease is NNN lease that tenants also pay property management fee.

NOI: Net Operating Income. Annual income minus Property Taxes, insurance & CAM fees.

Pad: stand alone building in a prime location of a big shopping center.

Pass Thru: see reimbursement.

Percentage lease: lease in which tenant pays base rent plus a percentage of tenant's revenue.

Phase I Report: inspection report that provides an assessment for soil/environment contamination. It's normally required by the lender as part of loan approval process for a commercial property.

Phase II Report: inspection report for soil & groundwater subsurface investigation. This inspection is more extensive which involves testing to see if there is any soil and water contamination.

Proforma income: potential, i.e. higher, income when the property is 100% leased.

Proforma Cap rate: potential cap rate assuming property is 100% leased at market rent.

Reimbursement: the share of property tax, insurance & CAM fees that a tenant has to pay the landlord besides the base rent.

Rent guarantee: rent paid by the seller to buyer for vacant spaces until they are leased.

SBA Loan: a government-guaranteed loan for owner-occupied properties.

What Commercial Real Estate Investors Should Know About Cap Rate


CAP rate or capitalization rate is the ratio of annual rental income of the property over the purchase price. This number is often shown on commercial property listings. So you must know this jargon if you want to invest in commercial real estate. It’s commonly a number between 3% to 10%. The higher the CAP rate the higher rental income the property produces and thus the less money you need for down payment. Experienced investors often look at the CAP rate to screen out properties with low rental income. Some investors prefer properties with the cap rate that is higher than the interest rate they pay for the loan. That way they know they collect more from the tenants than they pay the bank. When the property has high vacancy rate, listing brokers often show proforma (or potential) CAP rate instead to catch investors’ attention. Let’s use the following example to illustrate the point. A property is listed for $1M and is 90% leased. It has gross leases with an actual gross income of $90K/year and $30K of annual expense. Assuming the proforma income is $110K/year when it’s 100% leased at higher market rent. So 3 different listing brokers could display 3 different CAP rates for the same property:

• The first broker may use NOI (Net Operating Income) of $60K/year ($90K of gross income less $30K of expenses) and thus the net CAP rate is 6%. This broker calculates the cap the way it should be.

• The second broker may use the gross income of $90K and so the gross CAP rate is 9%.

• The third broker may want to use the proforma income of $110K to get investors’ attention and thus the proforma CAP rate is 11%!

So as an investor, you need to know what CAP rate, e.g. net, gross or proforma the broker uses. Otherwise you may offer too much for the property. At the same time, when you tell your broker to look for properties with a certain CAP rate, make sure the broker knows what CAP rate you have in mind.

The returns of a commercial property investment come from 4 sources: appreciation, cash flow, i.e. cap rate, depreciation (tax writeoffs), and principal reduction from your mortgage payments. If you invest in the “right” property, the biggest chunk of your investment return should come from appreciation. There is often a conflict between cap rate and potential for strong appreciation. Properties that offer potential for strong appreciation, e.g. newer properties or ones in good location tend to have lower cap rate. On the other hand, properties that are in poor condition, or have ground lease are much harder to sell. As a result, seller will try to attract the buyers with a higher cap rate. If you see a property with unusually high cap rate in California, e.g. more than 7%, you should ask yourself “what’s wrong with this property?” Chances are you will find a compelling reason why it is so high.

Is the property with highest cap rate the “best” property? The short answer is no. If investment was that simple, you would not need an investment advisor. Cap rate should be one of the various other factors you consider whether you should invest in a property. It should not be the only factor. Besides, you can improve the cap rate by

• Increase the occupancy rate.

• Raise the rent when the current leases expire.

• Negotiate for leases with annual rent increase.

• Bring in tenants willing to pay higher rent.

• Improve the property to attract more upscale tenants.

• Reduce the expenses not reimbursed by the tenants.

By doing so, you can increase the cap rate and consequently the value of your investment.

What Is The Best Commercial Real Estate Loan?


This question came from Kiho Kim in Anaheim, California and, surprisingly, doesn’t have a straightforward answer. When someone asks me that question, I know that they’re probably focused on one thing: The loan with the lowest interest rate. Unfortunately, in commercial real estate, this approach can end up costing you a lot of money.

When you get involved in commercial real estate, you become involved in a more sophisticated method of investing your money. Commercial real estate and commercial real estate loans have a lot of “moving parts” and the approach that commercial lenders take is far different from those in residential lending. When considering financing on a piece of investment property, you have to approach the process with ”commercial mortgage planning” in mind.

What is commercial mortgage planning? It’s a process in which all aspects of the loan are considered in the context of the commercial real estate investor’s current portfolio, future portfolio goals, style of investment, and cash flow needs. Let’s see how this works in a practical example and then use that example to further answer the original question in the first paragraph.

Which is the best loan? A 3/1 ARM with a declining 3 year pre-payment penalty of 3%-2%-1%, a rate of 6.75%, a full amortization of 30 years, and a margin of 2.50% over 6 Month LIBOR, or a 10 year fixed rate loan due in 10 years, with a 30 year amortization, at a rate of 5.9%, with a Yield Maintenance prepayment penalty until 9.75 years have passed?

On the face of it, the 30 due in 10 is almost a full percentage point less in rate! No brainer, right? Let’s fill in a few more details and see if this analysis stands.

The investor contemplating the loan is an active real estate investor who purchases properties that have vacancies or month to month tenants that are slightly run down and in need of upgrades. He holds properties until re-tenanted, renovated, and then sells them to generate cash for new purchases in a 1031 Exchange to preserve his buying power.

In light of this information, the 30 due in 10 would be a terrible loan. It’s likely that such an investor would be ready to sell the property in the 3rd year to take advantage of the 1031 Exchange holding period and provide a stabilized leasing history to a new buyer. He’d only face a 1% pre-payment penalty using the 3/1 ARM, something he could easily factor into his “costs.” The fixed rate loan with its Yield Maintenance pre-payment penalty could literally cost him hundreds of thousands of dollars, depending upon market conditions, when he goes to sell the property. In fact, it would likely contain a “lock out” clause completely preventing a payoff for up to 4 years. That loan would have to be assumed by the new buyer and the difference made up in cash, limiting the potential pool of buyers for that property.

So how does this example answer our question: “What is the best commercial mortgage?” This way: “The best commercial mortgage is the one that best fits the commercial investor’s short and long term goals, risk tolerance, investment style and the investment at hand.” And as a side note, be sure to work with someone experienced not only in commercial loan brokerage, but who will take the time to consider all of the factors that could affect the current and future transactions.