CRE-Finance LLC Clarifies Options for Commercial Real Estate Loans for Purchase Money Transactions

Online, April 25, 2014 (Newswire.com) - A purchase money commercial loan is a commercial loan that is used to buy a commercial property and which is secured by the same property. For example, if you refinanced your free-and-clear apartment building to buy a strip center, the new loan on the apartment building would NOT be considered a purchase money loan, even though the proceeds were used to buy a commercial property.

Most purchase money commercial loans these days are hard money loans.

Other types of financing are conventional commercial mortgage loan which is commercial loan made with no government guarantee. By the way, the SBA is not the only Federal governmental agency that guarantees commercial loans. Don't forget that the USDA also guarantees commercial loans using its Business and Industry loan program. A USDA Business and Industry Loan is a commercial real estate loan, guaranteed by the USDA up to 90% LTV, and made in a rural, lowly-populated area, that will create more jobs in the rural area.

So a conventional commercial mortgage loan is a commercial mortgage loan that is not guaranteed by the SBA or the USDA. Most conventional commercial mortgage loans are made by either commercial banks or conduits. A commercial bank is just a garden variety bank, as opposed to an investment bank or a merchant bank. The word "commercial" is just a fancy word for "business" and signifies that the bank is in business to make a profit.

An investment bank is a company that sells stocks and bonds and occasionally takes companies public. A merchant bank is usually a small group of very wealthy investors - guys who often own a bank or life insurance company together - who use their excess profits to make equity investments in risky, potentially high-yielding investments. There are probably fewer than 200 merchant banking companies in the whole country, and you'll probably never get to meet one. If you ever meet a so-called "merchant banker" at some commercial lending conference, the chances are 20:1 that he is a con man, an advance fee scammer, and/or a huge slinger of bull-pucky. Mortals like you and me don't get to meet real merchant bankers.

Purchase money commercial loans are often used to buy commercial investment properties. Examples of commercial investment properties include apartment buildings, office buildings, shopping centers, strip centers, mobile home parks, and self-storage facilities. They are properties where the income comes - not from running a business, like a restaurant or a bowling alley - but rather from plain-vanilla monthly rent. Commercial investment properties are purchased by real estate investors, rather than business owners.

Now we are finally getting to the point of this article. If a real estate investor wants to purchase a commercial investment property, like a multi-tenant office building, right now, the typical bank is going to require a huge down payment. Why? Because commercial banks are too scared to lend higher than 58% to 62% loan-to-value on commercial investment properties.

To make matters worse, commercial banks will not let the seller carry back a second mortgage. Why? They don't want to over-burden the property with debt. They are afraid that if a tenant or two moves out and the cash flow dwindles, the commercial property owner might be tempted to use the cash flow earmarked for repairs and maintenance to make the payments on the second mortgage. Soon the property becomes dilapidated.

This means that buyers of commercial investment properties today have to put between 38% to 42% down in cash! Who has this kind of cash?

Now if the purchase price is huge, say $5 million or higher, the buyer will probably use a conduit loan (aka: CMBS loan). Behind the conduit loan, the buyer will often take out a mezzanine loan. Then the buyer will put just 10-15% down in cash. The mezzanine loan fills the gap in the capital stack between 75% LTV (the maximum exposure of a CMBS loan) and 85- 90% loan-to-value.

A mezzanine loan is not a second mortgage. Instead, it's a personal property loan against the membership interests of the LLC that owns one of these big, trophy commercial properties. Remember, a share of stock is personal property, not real property. A membership interest in an LLC is also personal property, not real property. Seizures (foreclosures) of personal property can be completed in less than six weeks. Real estate foreclosures can take 18 to 24 months in New York and many other states. This is why these junior lenders make mezzanine loans, rather than second mortgages.

Therefore, if your investor is buying a commercial investment property for more than $5 million, he can probably get away with putting down as little as 10-15% of the purchase price, by using a CMBS loan, capped off by a mezzanine loan. The mortgage professionals at CRE-Finance LLC can help you with your mortgage needs.

You also have Preferred Equity - it's actually not a loan. It's an equity investment. Legally someone becomes part owners of the property; but they are only entitled to a Preferred Return that looks almost identical to garden-variety interest. Banks will allow Preferred Equity in "second position" because payments are NOT required. If the property doesn't generate enough cash flow some month to make the Preferred Equity payments, the payments do NOT have to be made.

Folks, Call us about all the programs that CRE-Finance LLC has to offer, including CMBS loans, Mezzanine Loans, Hard Money Loans and the Preferred Equity Program which is the most important development in real estate finance in years. It is the only way you will close purchase money commercial investment loans with little down payment. You can reach our mortgage professionals at 855-515-5515 and ask for Rich or Todd Tretsky or visit us online at www.cre-finance.com.