Written by Fernando Martin| December 19, 2018

Conventional Commercial Loans

Commercial loans can take 2 different forms – owner-occupied mortgages and investment mortgages. When the collateral is owner-occupied, the property’s sponsor(s) use over 50% of the building’s useable square footage for their personal businesses. Any other use makes the collateral investment property. It is important to note that in order to securitize a commercial loan properly Commercial properties must be zoned appropriately.

Conventional commercial loans are mortgages backed by commercial real estate that are provided by a lending institution such as banks, credit unions, savings and thrift institutions, life insurance companies, hedge funds, pension funds, private financial institutions, etc. These loans are usually secured by a lien position on the subject properties being financed. The collateral may be any type of commercial real estate.

Property types eligible are as follows: apartments or multifamily properties with over 5 units, office, retail, industrial, hospital & healthcare, self-storage, hotel, mixed use, and churches.

Conventional loans typically have a maximum LTV of 75-80%, while some lenders can stretch up to 85% in limited circumstances for financially strong transactions. Borrowers should expect to have “hard cash” equity invested in purchase transactions, while being able to maintain a post-closing liquidity sufficient to service their debt at the levels dictated by the lending institution’s credit department. Most conventional loans also call for an overall net worth equal to or greater than the loan amount requested.

Conventional loan transactions will need to be able to meet a Debt Service Coverage Ratio between 1.15 and 1.55 times (depending on the program) and this ratio is calculated at the underwriting rate dictated by the lender.

Term and amortization depends heavily on the institution providing the funding as well as the property type.

Terms usually range from 3-15 years with amortizations ranging from 10-30 years.

Conventional loans may be non-recourse, limited recourse, or full recourse.

Prepayment penalty structures vary greatly depending on the institution funding the transaction. Typical prepayment structures include; Yield Maintenance, Declining (or step-down) , flat, or may be specially structured to suit a construction or mini-perm loan.

For More Information on conventional commercial loans please visit our conventional loans page.