What Are Commercial Mortgage Lenders Looking for These Days?

Property Types
Apartment building loans have always been a favorite as far as commercial lenders are concerned. The fallout from the housing market has caused a ripple effect that pushed many families into the rental market. Now, many people are opting to rent over buying. The housing market crash has made the market for apartment building lending very strong.  All of these forces are driving up demand (and prices!) for apartment properties. Other favorable types of properties include:  retail centers with strong national anchors (such as supermarkets), medical and general purpose office buildings, and other properties occupied by strong tenants with long term leases.  Lenders also like small business owners that own their own properties and have demonstrated an ability to generate strong, positive cash flow in their businesses.  Another property type popular with investors and lenders are single-tenant, net-leased properties leased to companies such as Walgreens, CVS, AutoZone, Dollar General, etc.

 

Properties in Good Locations
The location of the property will have a major impact on the commercial rate and term you receive from a commercial lender. Lenders prefer urban and suburban metropolitan areas.  Rural areas present credit risks for commercial lenders.  Areas that show negative and declining population, income growth, and business activity will be scrutinized very closely.  While you may still be able to get financing in less than desirable areas, the rates and terms may not be as aggressive as those in more desirable locations.  The old rule of supply and demand will not only control the value of the property, but a lender’s interest as well.

 

Properties in Good Condition
A property that is in good condition will be more favorable than a property with extensive deferred maintenance. Properties in good condition typically exhibit better cash flow, lower vacancy, and a better historical operating history than properties that are in need of major repairs or renovations.  Lenders do not like the uncertainty brought on by uncertain cash flow.  During renovations, buildings are typically vacant or are operating at reduced occupancy, and the result is lower cash flow.  These properties are usually best served by a short term bridge lender until they are complete and stabilized.  Once the income is stabilized, these properties would once again qualify for institutional loans.

 

Credit-Worthy Borrowers
While some things change in the commercial mortgage industry, some things don’t. Trendy areas can change very quickly and become depressed. Depressed areas can turn into hot areas. Types of businesses can change. Video rental businesses were once considered a good candidate for receiving a commercial mortgage loan. As with other industries, the commercial mortgage industry is ever changing. Lenders try to keep up with changing trends in the business.  The one thing that does not change is a lender’s desire to lend to credit-worthy borrowers.  Lenders will look at a borrower’s credit scores, net worth, liquidity and experience before approving a loan.  

 

Bottom Line
Lenders do not like risk.  Lenders will always look for quality properties in good locations to credit-worthy borrowers.