Commercial Loans: Overview of Programs

We can help you find the right commercial loan program to fit all your business needs.

Creative Commercial Real Estate Loans with Flexible Requirements

Running a business is no easy task, especially if your business operations require owning commercial real estate, whether an “owner-user property” where you run your own business (e.g., retail, office) or an “investment property” that is rented to others (e.g., multifamily).

Unless you have plenty of cash, you will inevitably need a commercial mortgage loan to purchase commercial property. Or, if you’re already a property owner, you may need a cash-out refinance to tap into the equity.

However, not all situations are well suited for traditional commercial real estate loans. For example, a small business owner may struggle to qualify due to a low credit score and inability to show income through tax returns. Sometimes, the property itself is problematic and risky, such as a rental property that cash flows poorly.

There are creative commercial real estate loans available for your purchase or refinance needs.

As a mortgage broker, we offer innovative commercial real estate loans that go beyond traditional loan programs. Our programs embrace borrowers who:

  • Cannot show adequate income through tax returns;
  • Have low credit scores or have experienced recent negative credit events;
  • Are currently in bankruptcy or foreclosure;
  • Are foreign nationals or other non-U.S. citizens; 
  • Work in a controversial line of business, such as the cannabis industry; or
  • Are looking to purchase or refinance properties that are relatively risky (e.g., properties with low debt service coverage ratio (DSCR) due to poor cash flow, or collateral types that do not fit a traditional bank’s guidelines such as hospitality or other special-use properties).

People who can relate to any of the issues above are typically rejected by major banks, making them the “bank turndowns.” They are the “zebras” who stand out from the herd of qualified “horse” borrowers.

Was your business mortgage denied?  Do not lose hope yet. What you need is a creative and more flexible commercial loan that suits your needs.

This article will introduce you to creative commercial real estate loans and their flexible requirements.

The basics: What is a commercial real estate loan?

A commercial mortgage loan, also known as a commercial real estate loan (CRE loan), is a loan made to a borrower to purchase or refinance real estate properties that are zoned for commercial use. The commercial real estate serves as the collateral for the loan.

To understand commercial loans better, let’s break the definition down to its key terms:

What is commercial real estate (CRE)?

Commercial real estate is a “property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space, which would instead constitute the residential real estate.”

The major types of commercial real estate include:

  • Multifamily (5 units or more)
  • Mixed-use
  • Office
  • Retail
  • Industrial
  • Storage and warehouse
  • Medical
  • Hotels and motels
  • Mobile home parks
  • Vacant land zoned commercial
  • Special-purpose properties such as:
    • Religious places of worship;
    • Spaces for marijuana-related transactions;
    • Gas stations and convenience stores;
    • Automotive shops;
    • Elderly care facilities (assisted living facilities (ALFs); and
    • Restaurants. 

What is a purchase?

In a purchase transaction, commercial property is acquired by paying the agreed amount in exchange for owning the CRE to be used for income-generating activities.

What is refinance?

In a commercial real estate refinance, borrowers take out a new loan to pay off an existing one.

Refinancing can lower your current mortgage interest rate, thus decreasing your monthly payments. You can also consider cash-out refinancing if your commercial property has raised in value. You can then use the cash to invest in other real estate. 

Refinancing is recommended for people who:

  • Want to benefit from lower interest rates than what they have with their current loan;
  • Need to cash out the property’s equity for time-sensitive needs, such as expanding their business, buying equipment or inventory, debt consolidation, investing in other pieces of real estate, and other important purchases;
  • Are currently in a mortgage that is about to expire or balloon; or
  • Require a new lender that will take them out of foreclosure or bankruptcy.

Just like home loan refinances, commercial loan refinances fall into two categories: rate-and-term and cash-out. It is important to choose what type of refinancing suits your situation better, as a wrong move may adversely affect your business as a whole.

Rate-and-term

A rate-and-term refinance arrangement changes the existing mortgage’s interest rate, the term, or both of them. No new cash is advanced. Therefore, this type of arrangement is also called the no cash-out refinance. This refinancing move is often made when interest rates have been declining, or the borrower cannot keep up with the loan terms of the existing mortgage.

Cash-out

Cash-out refinance happens when new money is advanced on the loan. The cash comes from the existing equity in your commercial property, which you cash out as you substitute your old loan. In such an arrangement, the borrower receives cash together with their new loan.

If your credit is good, you can take out a significant amount of cash that may be used for any purpose. Not only that, but you can also end up with better interest rates when you choose cash-out refinancing.

General loan parameters

The borrower should carefully review and compare the available loan terms to see which offer suits their needs best.

There are countless commercial real estate loan programs available in the market, and with them come loan terms and parameters that vary from one another. Understandably, there is no one-size-fits-all loan because the best loan ultimately depends on the qualifications and requirements of the borrower.

Some lenders are stringent while others are more relaxed. However, there are some common loan parameters that are generally considered by all lenders.

Loan amount

The commercial loan amount offered by each lender differs based on the level of risk they are willing to take and the qualifications of the borrower and property type.

In the world of commercial mortgages, loan amounts fall into two main categories: small balance and higher balance.

Some lenders have carved out a niche area for what is known as small-balance commercial loans, characterized by loan amounts generally ranging from a minimum of about $200,000 to $500,000 to a maximum of about $2.5 to $5 million.

Other commercial lenders focus on higher balance loans with loan amounts ranging up to $50 million or more.

Loan-to-value ratio (LTV)

This metric determines how much the lender is willing to lend to the borrower. The higher the LTV, the more risk the lender is willing to take on, and that usually translates into a higher interest rate.

For purchase transactions, LTVs are computed by dividing the loan amount by the appraised value or the contract price, whichever is lower.

For refinances, LTVs are computed by dividing the loan amount by the appraised value.

Typical LTVs for commercial real estate can range up to 75% to 80%, but it greatly varies depending on the borrower profile and the property type.

Debt service coverage ratio (DSCR)

Also called the debt-coverage ratio, DSCR is a ratio used by lenders to assess the deal’s income potential compared to the expenses. Essentially, the DSCR is a quick indicator of whether there is enough cash flow to “service” or pay for the associated expenses.

The higher the DSCR, the better the deal cash flows.

Generally speaking, DSCR is calculated by dividing income by expenses. For example, for a multifamily property, DSCR would be calculated by dividing the property’s rental income by the property’s principal, interest, taxes, insurance, and association fees.

Some lenders require a minimum DSCR ranging from about 1.15 to 1.25. For example, a DSCR of 1.15 means that the property generates enough income to cover all of its monthly debt payments with 15% excess.

More lenient lenders allow a minimum DSCR of 1.0 to give a chance to borrowers looking to purchase or refinance properties that do not cash flow as well.

As discussed below, the exact calculation of DSCR depends on whether the subject property is occupied and used by the borrower themselves, or if the property will be leased out to others.

Occupancy type

There are two main ways to use commercial real estate. Properties used by the owner themselves to conduct their business’s operations are called owner-occupied (or owner-user), while a commercial property rented out to third parties is considered an investment property. Determining your property’s occupancy type is essential when applying for a commercial real estate loan.

From an underwriting perspective, the occupancy type is an important distinction.  For owner-user properties, the lender will typically perform a global DSCR analysis. In other words, the lender will analyze the profitability of the business itself, not just the cash flow of the property.

Specifically, for owner-user properties, DSCR is calculated by dividing the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) by the total debt service.

On the other hand, for investment properties, the lender will perform a DSCR analysis only on the property itself.

Specifically, for investment properties, DSCR is calculated by dividing the property’s net operating income (NOI) by the total debt service.

Credit score

A good credit score determines your creditworthiness in the eyes of the lender. This score ranges from 300 as the lowest possible score and 850 as the highest. While lenders will not ask you to have a perfect score, traditional commercial lenders typically require a credit score in the 700s.

If your credit score is lower than this, you will need to find an alternative lender that allows credit scores as low as the 500s to 600s.

Did you know that companies, like people, have credit scores, too? Some CRE lenders may scrutinize both your personal and company credit scores.

Terms and interest rates

The term of the commercial loan refers to the repayment period. Short-term bridge loans generally range from 6 to 24 months. Longer-term permanent loans are available at 5, 7, or 10 years, and even terms as long as 30 years. Amortization periods vary from 15, 25, to 30 years.

Interest rates are typically fixed for the life of the loan, but annual rate mortgages (ARMs) are available as well. 

The rate will depend on the property type, loan purpose, market size, LTV, DSCR, and the borrower’s experience, credit score, net worth and liquidity. 

Recourse vs. non-recourse

Another important consideration when taking out a commercial loan is whether it is a recourse or non-recourse type of loan. In a recourse loan, the borrower signs a personal guarantee making them personally liable for the loan. If the borrower defaults, this allows the lender to collect the balance from the borrower’s personal assets until the debt is fully paid.

Non-recourse debt is the opposite. Under this setup, a lender can only sell the collateral real estate if the borrower defaults. They cannot pursue the borrower’s personal assets, which gives added protection and reduced liability on the borrower’s side.

Before signing off a commercial loan, read carefully whether it is a recourse or non-recourse. You should also pay attention to the details because some lenders may include the “bad-boy” carve-out clauses, which would convert the non-recourse loan to a full-recourse when the borrower is found to be involved in any negligence or fraud such as delayed tax payments or submission of inaccurate financial statements.

Eligible properties

Generally, traditional commercial lenders have a shorter list of acceptable CRE types. For example, banks tend to only lend on properties with high DSCRs and avoid special-use properties. From the bank’s perspective, commercial buildings that are capable of general use (e.g., office and warehouse spaces) are easier to finance because they have an inherently lower risk due to a higher market demand from investors.

Creative programs, on the other hand, are more flexible, often accepting properties rejected by traditional lenders, including:

  • Property types that are otherwise traditional (e.g., multifamily, office) but for their low DSCR;
  • Properties in lines of business hit hard by COVID (e.g., restaurants, travel, hospitality); and
  • Special-purpose properties such as:
    • Religious places of worship;
    • Spaces for marijuana-related transactions;
    • Gas stations and convenience stores;
    • Automotive shops;
    • Gyms; and
    • Elderly care facilities.

As an example of a creative loan solution for a special-purpose property, DAK Mortgage helped a marketing executive looking to switch careers and open up his own gym. We obtained a $750,000 purchase loan, combined with a business line of credit, to enable his startup company to build the gym and acquire exercise equipment.

Creative commercial real estate loans

There are creative loans available for owner-occupied and investment commercial properties.

Like residential loans, commercial loans can also be flexible enough to cater to every borrower’s needs. The variations in business model, cash flow, financial standing, and qualifications of each borrower call for creative and out-of-the-box commercial loan options that are not offered by traditional lenders.

Following are creative commercial real estate loans designed to cater to borrowers looking for alternative solutions.

Small-balance commercial loans

When it comes to creative loans, a small-balance commercial loan is a perfect place to start. This niche area of lending specifically caters to borrowers who are overlooked by big banks and other traditional commercial mortgage lenders.

These loans are called as such due to their relatively small loan balances, with loan amounts typically ranging from a minimum of $200,000 to $500,000 to a maximum of about $2.5 to $5 million.

Traditional lenders overlook small-balance loans, favoring instead the higher balance loans. Ironically, however, the small-balance loan amount applies to a large percentage of U.S. commercial properties.

Hence, the small-balance lending niche industry was born to fill this need, and these loans offer several advantages compared to traditional underwriting guidelines:

  • Available for all types of commercial property, including special-use properties;
  • Less rigorous underwriting requirements compared to higher balance loans;
  • Relatively easy and quick to close due to the streamlined underwriting process; and
  • Greater selection of products with more flexibility.

These loans are ideal for borrowers who:

  • Were turned down by a bank or another lender because of small loan size and/or poor credit;
  • Do not report enough income on tax returns (usually the case for self-employed individuals who write off a lot of expenses, or for investors who struggle to show consistent growth through tax returns);
  • Need to cash out a considerable amount of equity; or
  • Need a long-term fixed rate.

As mentioned above, one of the hallmarks of small-balance lending is its wide variety of programs under which borrowers may qualify. Below we discuss the different levels of documentation, from full documentation to no documentation:

Complete Documentation Program (Full Doc)

Complete documentation comes with the best small-balance commercial loan terms and interest rates. As its name implies, it requires complete documentation of the borrower’s income. Borrowers who have all the documents available and ready may also apply for traditional loans offered by banks. However, others still opt for small-balance loans for several reasons.

Specifically, this program is suitable for:

  • Creditworthy investors or business owners looking for an alternative to restrictive bank financing but seeking bank-type rates;
  • “Near-miss” borrowers who fell just outside bank guidelines and were rejected by banks; and
  • Borrowers who simply choose not to work with traditional banks because they need greater flexibility (such as faster closing times or higher cash-out amounts).

Under the full doc program, small-balance lenders typically require:

  • Two years of personal and business tax returns;
  • Credit report;
  • Operating statement;
  • Profit and loss statement;
  • Rent rolls and leases (if applicable);
  • Purchase contract (if applicable); and
  • Personal financial statement.
Light Documentation Program (Light Doc)

Light documentation is a variation of the complete documentation program wherein some of the requirements are modified to meet the specific needs of other borrowers. Most notably, tax returns are not required.

Specifically, this program is suitable for borrowers:

  • Who may not be able to disclose all of their financial information for whatever reason;
  • Who own properties that are more valuable than indicated in the tax return; and
  • Who usually show losses on their tax returns.

Under the light doc program, small-balance lenders typically require:

  • Operating statement and rent rolls (instead of your tax returns);
  • Credit report; and
  • Other schedules as necessary (debt, capital expenditure, and deferred maintenance).
Bank Statement Program

It is not uncommon for business owners to shy away from presenting their tax returns. To cater to this type of borrower, the bank statement program offers a solution by replacing the tax return requirement with the borrower’s bank statements.

Specifically, this program is suitable for borrowers:

  • Who cannot or prefer not to submit their tax returns but are willing to show their bank statements.

Under the bank statement program, small-balance lenders typically require:

  • Bank statements (from the past 12 to 24 months) to prove you have enough income to qualify for the loan (instead of your tax returns)
  • Credit report; and
  • Other schedules as necessary (debt, capital expenditure, and deferred maintenance).

For example, DAK Mortgage obtained a small-balance commercial loan under the bank statement program as follows:

  • A family-owned tile and pavers company needed to purchase a retail building to run its business.
  • Their tax returns were not enough to show their ability to repay the loan.
  • Using 12 months of their business bank statements, we got them approved for a commercial purchase loan at 75% loan-to-value.
No Documentation Program (No Doc)

Finally, the no documentation program, as its name suggests, requires no documentation, i.e., no income verification via tax returns, bank statements, operating statements or any other documents.

Like everything in life, there are tradeoffs. Here, in exchange for the lack of documentation, the small-balance lender requires relatively higher credit scores, usually at least 700.

Instead of focusing on the property’s DSCR, the lender will rely mainly on the borrower’s credit score, the LTV, and third-party consumer credit information.

To learn more about your options, please read about our super-creative small-balance commercial loan programs.

Construction and renovation loans

Commercial construction loans can help business owners, builders, and developers in their construction and renovation projects.

Sometimes, borrowers prefer to build their properties from the ground up rather than buy a ready-made one. In situations like this, commercial construction loans offer a feasible financing solution.

A commercial construction loan is a short-term form of financing typically lasting from 1 to 3 years, depending on the duration of the borrower’s construction or renovation project. Aside from the materials and labor, the loan proceeds can be used to acquire the land where the property is to be built and cover the costs of obtaining permits, such as the land entitlements.

Both investment and owner-occupied occupancy types are eligible for creative construction loans. These loans finance a wide range of projects, including the typical construction of a single commercial property or major redevelopment and value-add projects to boost your rental income, or to flip the property later on. There are also innovative loans specifically designed for builders and developers looking to build multiple properties at a time.

With construction loans, the property to be built acts as the collateral, which makes it riskier because, unlike other commercial loans, the collateral is not yet existing in the first place. As a result, construction loans typically come with higher interest rates and a shorter repayment period. It requires interest-only payments while the construction is ongoing, with a balloon payment at maturity. As such, it is important that you have a clear and well-planned exit strategy even before maturity, especially if you do not have the liquidity to settle the balloon payment in cash.

Learn more about DAK Mortgage’s commercial construction loans in Miami

Bridge loans

While small balance loans help finance most commercial real estate transactions, they cannot give a guarantee for time-sensitive transactions where the closing or maturity date is just around the corner. When you need to purchase or refinance a commercial property as soon as possible, a bridge loan can serve your purpose better.

Also known as hard money, private, or collateral-based loans, a commercial bridge loan is a powerful tool that gets you to the closing table fast. 

Besides speed to the closing table, bridge loans are also characterized by their short terms, usually 6 to 24 months, and they typically lack a prepayment penalty.

Therefore, once you’re past the closing table, you have enough breathing room to lay the foundation to exit the bridge loan and secure a lower-interest, longer-term loan if necessary. 

There are many scenarios where a bridge loan is ideal to satisfy pressing needs. For example, if you find a great deal on an office building in a prime location, a bridge loan can help you purchase it quickly before someone else snaps it up. 

Or you may have an unstabilized asset such as an outdated multifamily building with vacancies. A bridge loan would give you the funds and the time to renovate and lease-up the property. 

Bridge loans are also useful to refinance a maturing loan, facilitate a partner buyout, or to get cash-out of existing properties to make other time-sensitive acquisitions. A bridge loan can even carry your business through a difficult phase such as bankruptcy. 

For example, DAK Mortgage obtained a commercial bridge loan in this difficult scenario:

  • A foreign-owned logistics company was seeking a cash-out refinance on their three office condominium units. 
  • They were turned down by a bank due to low DSCR and status as a foreign national. 
  • With the maturity date on their current loan fast approaching, we obtained a quick, short-term bridge loan from a private lender. 
  • Because there is no prepayment penalty, our client will be able to refinance to a longer-term program as soon as they improve their cash flow and have guarantors with more financial strength.
  • Read more about this success story.

Learn more about DAK Mortgage’s bridge loans in Miami.

Debtor-in-possession (DIP) financing

DIP financing is a special type of bridge loan meant for companies going through bankruptcy.

“DIP” stands for “debtor-in-possession,” the legal term for a company that has filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, but is still in “possession” of the property in question.

As such, the company still needs to operate the business during the bankruptcy proceedings. That is where DIP financing comes in. Usually in the form of a short-term bridge loan, DIP financing gives the company the liquidity it needs to pay its vendors and suppliers and otherwise continue its day-to-day operations as the bankruptcy proceeds.

If your company is in distress, you may be in need of debtor-in-possession financing.

For example, on behalf of a swimming pool company in Florida that filed for Chapter 11 bankruptcy, DAK Mortgage obtained $1.25 million in DIP financing to allow the company to fund its day-to-day operations during the bankruptcy proceedings.

Learn more about DAK Mortgage’s DIP financing.

Foreclosure bailout loans

Foreclosure bailout loans are another special type of bridge loan. They are specifically designed for borrowers who are facing foreclosure due to defaulting on their mortgage, the most common default being failure to make mortgage payments.

A foreclosure bailout loan can come in handy at any stage of foreclosure, including pre-foreclosure when the lender sends a notice of default, or after the lender has formally brought a foreclosure action in court, or even days before the foreclosure sale is scheduled to take place.

With this type of loan, the borrower is able achieve their main goal – to keep their property and save it from being sold off at a foreclosure auction. Essentially, the foreclosure bailout loan is a refinance, with the new lender making a new loan to the borrower, the proceeds of which go to paying off the original lender. In turn, the original lender dismisses their foreclosure lawsuit.

It may seem counterintuitive for a lender to provide a loan to a borrower who has previously defaulted on their mortgage. However, alternative lenders take pride in this type of loan and have carved out a niche area not embraced by traditional lenders.

Though the specific loan terms and requirements differ from lender to lender, the following are general parameters for foreclosure bailout loans:

  • Minimum loan amount: $500,000 or lower on a case-by-case basis
  • Loan-to-value: 65% or higher on a case-by-case basis
  • Interest rate: 9% to 12%
  • Repayment term: Up to 3 years, with interest-only option and no prepayment penalties
  • No credit score requirements
  • Available to U.S. and non-U.S. citizens alike

Learn more about DAK Mortgage’s foreclosure bailout loans.

Commercial loans for foreign nationals and non-U.S. citizens

Landing a commercial mortgage loan if you are not a U.S. citizen may be a challenge, especially for traditional loans. Fortunately, there are creative alternative lenders offering mortgages to non-U.S. citizens who want to purchase or invest in U.S. commercial real estate.

To provide opportunities to more borrowers, creative lenders offer commercial purchase or refinance loans to foreign nationals, non-permanent resident aliens, and green card holders.

These loans come with a higher risk, so a higher interest rate and lower LTV should be expected.

For example, if a U.S. citizen qualifies for an LTV of 80%, a non-U.S. citizen may expect a loan offer with an LTV of 65% for purchases or 60% for refinances.

Learn more about DAK Mortgage’s Commercial Loans for Foreign Nationals and Non-U.S. Citizens.

Why Choose DAK Mortgage?

DAK Mortgage offers more than just your traditional commercial loans.

For over a decade, David A. Krebs was a commercial underwriter at major banks, approving and denying loans. Based on his first-hand experience, he knows what you need to get approved and how to get the right financing tailored to your specific needs.

Our creative commercial real estate loans aim to address the biggest roadblocks in qualifying for your most needed financing. We offer out-of-the-box commercial loans to help you pursue your dream business, start your investment, or expand your business operations.

If you are turned down by a bank, reach out to us today so we can discuss your best alternatives.

Table of Contents