How can I estimate what the mortgage payment on a commercial building loan will be?

December 4, 2006 3:52 PM

How can I estimate what the mortgage payment on a commercial building loan will be?

I know that commercial loans are different from home mortgage loans. I'm just having a hard time figuring out what typical terms are for them. I was going to just fill out a lendingtree.com request, but they require your phone number. (I might end up doing that anyway.) I need this to figure out how affordable certain buildings are. Is there any good, fast way of estimating this?

posted by ignignokt to work & money (7 comments total)

If you're buying commercial, that means you're probably above 4 units (at which you'd usually qualify for a residential loan).

I'm not sure online people like lendingtree even handle commercial loans -- these tend to be pretty specialized, and involve lots of tire kicking before the loan finalizes (called due diligence).

Best thing is to ask realtors who list the commercial properties you like for names of mortgage brokers. Then, call them up and see what the rates are.

In the meantime, you can use loan rates advertised by the residential lenders as a rough yardstick for your commercial loan -- but be sure to pad your estimate with room for rate changes and hidden fees.
posted by Gordion Knott at 4:05 PM on December 4, 2006 [1 favorite]

Quick answer: Assume interest-only loan, ask around to get a handle on rates, divide rate by 12 and multiply by loan amount to get monthly payment. e.g., Monthly debt service on $1MM @ 12% rate is 1% of $1MM or $10K/month.

Long answer:

I've been out of the business for a few years so it's possible some of this may have changed, but a lot depends on what kind of building/what kind of use you're talking about.

Terms can vary significantly, so the quick and dirty method is to assume your entire payment covers interest only (I/O or close-to-I/O loans aren't uncommon on commercial buildings.) You need to get a handle on rates -- ask around at commercial real estate agencies and they can probably give you a few guys to call. True commercial lending involves a lot more work than residential, so you should be able to find an originator who'll give you a few minutes without being afraid of a hard sell - they'll be feeling you out just as much as you are them.

Once you know roughly what kind of note rate's you'll be looking at, take that percentage, divide by 12 and multiply by the amount you want to borrow to get your monthly payment. You want to make sure your debt service coverage ratio, or expected monthly net income / expected monthly debt service is > 1. 1.2 is good. That net income has to be figured after expenses, taxes, hazard insurance, maintenance, etc. Basically everything up to income tax and dividends.

The lender will also probably expect you to maintain separate tax and insurance escrow accounts with them (which means less volatility/less chance of default, but it means your month-to-month layout will be higher.) That totally depends on local costs and your building but you should already have an idea of what those will be from the real estate agent. Divide that by 12 and add to your monthly cash layout. They'll probably let you keep the money in some kind of minimally-interest-bearing but very secure account (laws requiring interest payment on residential loan escrows typically don't apply to commercial loans.)

If it's a big enough building, the lender may also want you to maintain separate reserve accounts, typically to cover things like having to replace a boiler. I don't know how much that'll be but it's going to be a function of the expected life of the major building systems and how much it'll cost to replace them. This is your money until you spend it; that is, even if you can't get to it, it doesn't go anywhere until you replace the boiler/whatever, and if you sell the building you can keep whatever's left. It will be a monthy negative cash flow, though, even if it doesn't affect your balance sheet.
posted by Opposite George at 4:54 PM on December 4, 2006

Oh, and I totally pulled that 12% out of my butt to make the math easy - I really have no clue where rates are right now but I assume they're lower (usually, they're adjustable on Commercial properties anyway, or at least they used to be.)
posted by Opposite George at 4:59 PM on December 4, 2006

Also, as the price for commercial properties is essentially limitless (i.e. can be in the billions), the kind of financing can be more creative than for smaller purchases, so interest rates can range all over the map. However, I understand that many commercial loans have a floating interest rate tied to the LIBOR plus some number of basis points. I was looking at a loan for LIBOR + 225 basis points (aka LIBOR + 2.25%) but that was for the purchase of a larger property (multiple millions of dollars). I would guess you might be able to take the LIBOR + 3% and get a decent idea.

Also, note that your interest rate will also depend on the current tenancy. If the building has pre-existing long-term leases with established tenants, the cash flows are more certain, and thus you may be able to get a lower rate (less risk for the lender). However, if you're buying a rental property, it may not be negotiable.
posted by mjbraun at 7:01 PM on December 4, 2006

Yeah, LIBOR plus a spread sounds right. One major exception was Government-sponsored project loans on multi-family buildings, which were usually indexed off some Treasury rate (which one escapes me,) but I don't even think those programs exist any more. Typical adjustment periods ranged from one to three years if I remember right.
posted by Opposite George at 7:21 PM on December 4, 2006

Prime is 8.25 right now. Depending upon your credit, the sort of capital you have to bring to bear, and a ton of other variables, you can probably do as well as Prime+1/2 or Prime+.75 right now depending upon your market. "Prime" or "Wall Street Journal Prime" is the most-used rate in my area. In your area it may be LIBOR. Since I don't know where you are, I can't offer a guess.

I work in banking, and without getting into my current position and without offering anything that in any way looks like advice, I will tell you that you need to find a lender that you like (and/or that someone you know recommends) and see if s/he can put together a prospective package or just do an estimate for you. I love the internet, man, but I think a real person is a good thing here. If you live somewhere that there have been a lot of acquisitions (like, say, Georgia) then there are a TON of start up banks, and those guys are hungry for loans. Not to mention that community banks will someimes do loans the big guys won't do. Commerical lending guys know how to make things happen, and if they can't, they might know how to refer you to somone (say, an Small Business Administration loan lender) that can make it happen for you. Depending upon the details, I may or may not be able to answer more specific questions, but if you email me I will be happy to see if I can or not.
posted by Medieval Maven at 7:25 PM on December 4, 2006

All right. Thanks, guys. These are great answers. It sounds like I'd need a lender to get me prospective package to get a real answer, but that I can eyeball things for now using Opposite George's "quick answer."

That's very interesting about being able to qualify for a residential loan if the building has four units or less. Does that apply even to buildings that are explicitly for commerical purposes, like stores?

That the rate changes for having established tenants is good to know, too.
posted by ignignokt at 1:40 AM on December 5, 2006