Chinwe Onyeagoro, CEO, Fundwell
[Today’s post is the first in an exciting new series on the intersection of commercial real estate and financing with special guest blogger and FundWell CEO Chinwe Onyeagoro. FundWell is part of the REach 2014 class of companies, recognized for their work to expand financing options for the commercial market. See FundWell’s website for more info and stay tuned here on The Source for updates about how to register for our upcoming webinar with Chinwe later this month! –WG]
There are many different kinds of financing options for commercial real estate deals. And understanding the mix of commercial loan products available to you and your clients could make the difference between completing a transaction and losing it. 2013 was a very good year for commercial real property investors. According to CoStar COMPs data, sales of office, industrial, retail, multifamily, hospitality and land totaled $366 billion. The vast majority of these commercial real estate acquisitions were financed using third party firms like banks, non-bank SBA lenders, and commercial real estate lenders.
The Five Commercial Real Estate Loan Products
There are five basic types of commercial real estate term loan products. (A term loan is a loan with a specific, fixed principal amount and a set maturity date and repayment schedule, which does not include line of credit financing (e.g., revolving construction lines)).
Permanent Loan
Mini Permanent Loan
7A Loan
504 Loan
Bridge Loan
Below is a cheat sheet on these five loan products and some fun facts about each:
1. Permanent Loan
Description: Conventional, long-term commercial real estate financing from a bank
Eligibility Criteria: You must be near perfect. Translation: you need to have a 700+ credit score (or a good story as to why you don’t), lots of positive net cash flow businesses and/or investment properties, high balances in your business and personal bank accounts, and the property needs to have at least 1, but ideally 2 years of positive net operating income (NOI).
Permanent Loan Pros:
15 to 30 year terms
Prime to near-prime interest rates
Permanent Loan Cons:
Hard to qualify
30-60 days approval time
2. Mini Permanent Loan (Mini Perm)
Description: Conventional, short-term commercial real estate financing from a bank
Eligibility Criteria: You pretty much need to meet all of the criteria for a permanent loan, except the target property does not have to have positive net operating income (NOI). However, your Sources and Uses statement needs to show how you will use the loan funds to make the subject property income producing (e.g., acquire property, do construction/rehab, lease up, etc.) so you can qualify for long-term financing before your Mini Perm loan matures.
Mini Perm Pros:
1 to 5 year terms
Prime to near-prime interest rates
Mini Perm Cons:
Hard to qualify
30-60 days approval time
3. 7A Loan
Description: Alternative funding for commercial real estate, equipment, and/or working capital from a bank or non-bank lender certified by the U.S. Small Business Administration
Eligibility Criteria: Can only be used by eligible small businesses. If you are close, but do not yet qualify for a conventional loan from a bank you may qualify for this funding.
7A Pros:
Up to 25 year terms
6 to 10% interest rates
Can also use for working capital and equipment
7A Cons:
Max loan amount: $5 million
30-60 days approval time
4. 504 Loan
Description: Alternative funding for commercial real estate and/or heavy equipment from a bank and a non-bank lender certified by the U.S. Small Business Administration
Eligibility Criteria: Can only be used by eligible small businesses who own or occupy 51% or more of the commercial property. If you are close, but are not yet qualified for a conventional loan from a bank you may qualify for this funding.
504 Pros:
10 to 20 year terms
6 to 10% interest rates
Can also use for working capital and equipment
504 Cons:
Lots of paperwork required
45-90 days approval time
Max loan amount: $20 million
5. Bridge Loan
Description: Alternative funding for commercial real estate from a private and/or hard money lender
Eligibility Criteria: If you don’t yet qualify for funding from a 7A or 504 lender and you have a plan to acquire and/or improve an asset that will eventually secure better funding, then you may want to try a bridge loan. However, it won’t be a cake walk, the cardinal rule still applies. You need to show you have a history of mostly paying your bills on time (minimum 620 credit score) and enough cash flow from personal and investment income to cover the property operating expenses and the debt service (principal and interest) for all existing loans that you have and the new loan you are applying for.
Bridge Loan Pros:
1 to 5 year terms
Easier to qualify
Bridge Loan Cons:
10-20% interest
30-60 days approval time
There they are: the five jewels of the commercial real estate financing market. Depending on who you are, what your financial profile is, and how you plan to use the commercial real estate, one or more of these loan products will be right for you.
Now that you have a good handle on what the options are and the pros and cons of each, you should take a look at your existing commercial real estate investment portfolio and make sure you are currently getting the best possible deal with respect to interest rate and term. If you are not, you could save yourself a lot of cash by refinancing. That’s cash that could be used to reinvest in your business, buy more commercial real estate properties, or reserve for a rainy day. And for those that work with and/or support commercial real estate investors, encourage them to explore their options and evaluate the financing on their current properties and/or planned purchases. If you help save them some money today, I can assure you, that you will continue to be their go to resource for commercial real estate in the future.
ABOUT THE AUTHOR
Chinwe is the CEO & Co-Founder of FundWell. Chinwe has a strong personal interest and a professional track record devoted to helping organizations raise capital. She co-founded, capitalized, and operated a boutique consulting firm that over the last seven years has successfully raised a total of $120 million in grants, competitive loans, tax incentives, government subsidies, and owner equity financing on behalf of clients across the country. Chinwe’s consulting experience includes McKinsey & Company, where she provided financial and strategic business advisory services to Fortune 1000 company executives, and while at Monitor Company (now owned by Deloitte) she provided strategy and financial analysis for public and private sector clients, and managed a $3 billion dollar real estate account. Chinwe has a B.A. in Economics from Harvard College and is a Henry Crown Fellow of the Aspen Institute.
ABOUT FUNDWELL
FundWell (www.fundwellre.com) is an online resource that prequalifies and connects commercial real estate investors and small businesses seeking funding with a growing number of bank loans, non-bank debt funding, and other credit related financing options.
FundWell delivers a 75% loan approval rate in a marketplace where they typically face a 30% approval rate. FundWell helps commercial real estate brokers increase deal flow and speeds up closings by referring their clients to prequalified lenders that will fund their real estate needs and business expansion plans. FundWell also helps real estate brokers access financing to grow their businesses.
Since 2012, FundWell’s online financing marketplace and financial health information has reached over 24,000 small businesses, working in partnership with over 300 lending partners across the country that span 13 different types of loan products from conventional bank loans and SBA loans to factoring, equipment loans and commercial real estate loans.
By: Wayne Grohl (The Source)
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