Veteran real estate investors know the story well: It’s very easy even for successful commercial property investors to become asset rich, but cash poor.
The problem can get particularly acute when it’s time to turn a property around after a tenant’s departure, for example. Or when you need to make a major unexpected repair. Or maybe you need to raise fast cash to take advantage of a time-sensitive opportunity. In any case, it’s difficult to make these moves in commercial property investment when your wealth is locked up in illiquid assets.
In the past, landlords and partners in property firms didn’t have many options. But fortunately, that’s changing, thanks to a new breed of non-bank, alternative lenders that has emerged to help meet the financing needs of this long-underserved market.
Selling, of course, is expensive. Not only are there real estate commissions and transaction fees on sales, but unless you’re rolling the entirety of the proceeds into a like-kind property, you may also face significant capital gains liability on any profits.
On top of that, you may face substantial pre-payment penalties, especially on CMBS mortgages. So refinancing could be unattractive, and outright selling the property could be a non-starter.
The good news: If you have significant equity in real estate – even in the form of an interest in a partnership, LLC, or other real estate-owning entity – there are several ways you can unlock that dormant equity, so you can attract newer and better tenants, build to suit, or use your newly-liberated equity to close on a new property.
Furthermore, these lenders can be much faster and more efficient than jumping through hoops trying to qualify for bank financing. For many commercial landlords, trying to refinance a first mortgage can take weeks or months. That’s because they too often have a seemingly unending list of requirements, like tax returns, bank statements, documents, and forms. They are too often more interested in covering their tails than in closing on productive and mutually beneficial deals. With traditional bank lenders, delays are interminable.
But we have relationships with lenders who can routinely close in 7 to 10 days.
Not all mortgage brokers are familiar with these non-bank lending alternatives. It helps to work with an experienced broker who understands commercial real estate, small balance lending, and these types of niche markets.
At DAK Mortgage, we focus on providing commercial mortgage programs and solutions to mortgage problems that traditional bank lenders can’t match.
If you’re frustrated because you have significant equity in your property or your interest in a real estate company, but feel hamstrung because traditional lenders and bankers just can’t seem to understand your situation, you still have a number of great options. Even if you’ve been turned down outright by unimaginative or conventional lenders, here are four proven techniques you can use to unlock your equity:
Scenario 1: Commercial property investment refinancing without tax returns
Here’s an all-too-common situation with commercial landlords. You have owned your commercial property for some years, and the property’s appreciated handsomely. There are no liens or other encumbrances. Things have gone well. But recently, multiple key tenants decided to close their doors or otherwise depart in quick succession. You need to take care of some cleanup and do some significant remodeling to get your property up to snuff for a new tenant – and need to get a loan to pay for it.
But there’s a problem: Your bank tells you that since the tenants left, your net operating income listed on your most recent tax returns is insufficient. The DSCR (debt service coverage ratio) is too low. You no longer qualify for bank financing.
Sure, you expect to make that revenue back and more once you have the newly-improved property rented out again. But the bank just can’t seem to think through the problem. Your bank loan officer may even privately agree with you. But the bank’s lending guidelines are clear: There’s nothing they can do.
The solution: Find a lender willing to value the property based on current market rents. Not just your tax returns. The appraisal will show both an income and market value approach to valuing the property. Our lending programs should help you get quickly approved based on the property value, minus any existing mortgage.
No tax returns needed.
Here’s a case where a client initially had trouble finding a loan because of liquidity issues. But we were able to match him with a lender who looked not just at the cash flow, but also at the market value of the property based on comp sales, as well.
Scenario 2: optimizing your commercial investment property mortgage
Suppose you have an opportunity to buy a very promising new property at a great price. But again, most of your wealth is tied up in your existing commercial property. Right now, you’ve got a very competitive mortgage on it that you’d rather not disrupt. Furthermore, even if you were willing to refinance that mortgage, the defeasance terms of that loan would require you to compensate the lenders for the lost interest income. That would defeat the purpose of refinancing.
You go to your bank to apply for a second mortgage on top of your existing one.
You’ve got plenty of equity – about 65%, even with the existing mortgage. But the bank notes that some of your tenants had a couple of late rent payments in the past year, and so they turn down your loan request.
The solution: Don’t refinance your existing loan. Instead, you could go to an alternative non-bank lender willing to loan against part of your remaining 65% equity in the form of subordinated debt.
This approach has several advantages compared to a complete refinance:
- You can keep the favorable rate on your existing mortgage, which is better for your cash flow.
- You sidestep the defeasance requirement or any other prepayment penalties on the existing loan.
- You can get your cash almost immediately. So you can take advantage of fleeting opportunities or react quickly to emergencies.
Scenario 3: Navigating partnerships in commercial property investment
This approach can be a great match for limited partners looking to retire or ‘accidental landlords’ who have inherited partnership interests in real estate owning entities. This is common when a partner passes away and the executors need to convert the partnership interest to cash to divide among the heirs.
Even if you don’t own the property itself outright, and therefore can’t sell the property directly by yourself, you still have a powerful option: Sell your interest in the partnership.
This has several advantages:
- You can get cash quickly – within days of submitting documents and information.
- The surviving partners don’t have to buy you out with their own money.
- The new partner brings substantial real estate experience and knowledge into the partnership. Probably more than the “accidental landlord” or any given probate lawyer.
- No tax returns required.
Scenario 4: Borrow against your ownership interest
Suppose you own an interest in a partnership, and you don’t want to leave it. But you’re currently incurring a short-term cash crunch for some reason. Say, it’s a down market, and you don’t want to sell at a discount.
In this case, we could find you a lender willing to let you pledge your interest in the partnership as collateral for a loan. In the private equity world, this is sometimes referred to as mezzanine financing.
In the event of a default, the lender would receive an interest in the partnership.
Once the loan is paid off, you continue as a partner, just as you were before.
The advantages: You receive the cash you need within days. Meanwhile, you keep all the incidents of ownership in your partnership. If your partnership interest increases in value, you get to keep it. If it issues dividends, you keep the dividends. You keep the entire upside. Just make your agreed-upon loan payments. And there are no tax returns required.
Meanwhile, there’s no prepayment penalty to worry about, and no capital gains taxes. Because nothing was actually sold.
Note: These loans are available both to general and limited partners. You don’t have to be actively involved in the real estate entity to qualify. These also work for LLC interests, tenancy in common (TIC) interests, or Delaware Statutory Trust (DST) interests.
What property types qualify for these types of financing?
These approaches work with a wide range of property types, including:
- Multifamily (five units or more)
- Mixed-use
- Office
- Retail
- Warehouse
- Industrial
- Storage
- Automotive
LTV and other criteria
These solutions may be appropriate if your liquidity needs are in the $500,000 to $5M range and up, provided you have some equity in the property. Normally, loans are capped at a combined total, including previous mortgages, of 75% LTV.
For example, suppose your property is worth $4 million. You have a $2 million mortgage still on the property. Without tax returns, these lenders are ordinarily willing to lend an additional $1 million, which would put the total combined loan-to-value of both loans at 75%.
Personal credit may be a factor: The best terms will go to those with FICO scores over 650.
Conclusion
Navigating the complexities of commercial property investment requires expert solutions, especially when traditional banks fall short. If you’re seeking to unlock your property’s equity quickly and efficiently, our specialized lending programs are tailored for your unique situation. Don’t let a liquidity crunch hold you back.
Contact us for a personalized consultation and discover how we can help you maximize your commercial property investment. Let’s turn your assets into opportunities today!
FAQs about commercial property investment
What makes commercial property investment a good choice?
Commercial property investment offers the potential for higher returns and stability compared to other investment types, making it an attractive option for diversifying portfolios and securing long-term financial growth.
How can I unlock liquidity from my commercial property?
Unlocking liquidity involves refinancing, selling, or leveraging your property. Tailored solutions like non-bank lending can provide quick access to funds, especially in situations where traditional banking falls short.
What are the risks involved in commercial property investment?
Like any investment, commercial property comes with risks such as market fluctuations, property management challenges, and tenant-related issues. However, with proper strategy and management, these risks can be effectively mitigated.
Can I invest in commercial property with limited capital?
Yes, there are ways to invest in commercial property with limited capital, such as joining investment groups, opting for smaller properties, or exploring creative financing options.
How does commercial property investment compare to residential?
Commercial property typically offers higher income potential, longer lease terms, and less turnover compared to residential, making it a more stable and lucrative investment option for many investors.
