Reverse 1031 Financing Solutions: Commercial Property Financing

Commercial Property Financing

Large commercial transactions have always been the driving force of the 1031 Exchange industry. However as exchanges have gained popularity, and in lockstep with robust real estate values, many smaller commercial properties are being purchased (and improved) in exchanges.

To assist the commercial property exchanger, our objective is to arrange Interim financing during the exchange, to be followed by permanent financing to replace the Interim loan at its conclusion. Note that borrowing out additional equity is not the original intent of this approach.

Acting as a consultant, and in tune with the needs of the 1031 Reverse Exchange customer, we will avail the commercial property buyer with a wider range of lending programs than might normally be available through regular, local sources. For example, what might be considered a problematic issue with your local lender may be a well-known and accepted risk factor to a larger bank located elsewhere in the Country.

If you are unhappy with the response to your Replacement Property loan proposal, let us present your financing request to our pool of specialized commercial lenders. Short-Term funding for Renovations, Construction and Equipment Purchases are also generally available during the exchange process.

While the commercial lending community has generally been more flexible in regards to the LLC titling issues and the non-recourse language required of Safer-Harbor Reverse Exchanges, for transactions under $5 million it is not always the case. If you are an investor, small business owner, or rental property owner who is seeking financing for a Parked (Exchange-Last) property, you may be woefully underserved. Please take a few minutes to complete the Reverse Exchange Pre-Qualification Worksheet and Additional Information form and email them to FrankH@reverse1031financing.com

Differences between commercial property loans and residential property loans

Appraisals are much more comprehensive, and require a specialist. These appraisals are often 60 to 100 pages long and give a complete picture of the income potential as well as the physical property, plus how it compares with other properties in the area. The cost starts at $1500-$3000 and takes more time, from 3 to 6 weeks.
Application, approval, underwriting and closing takes more time, typically 45 to 60 days for a permanent mortgage financing. Fortunately, if time is of the essence, this timeframe can be speeded up because only short-term, interim financing is utilized for the replacement property purchase. If desired by the borrower and agreed upon by the lender, a permanent loan can be arranged to coincide with the termination of the interim financing or the final closing of the exchange. While the interim financing can be cross-collateralized with your relinquished property to allow a very high loan to value, the permanent financing will typically stay limited to a 75% loan to value which fits in well to the post-exchange situation.
Structure and Duration of a commercial loan is different from a home mortgage, and typically is of shorter duration. Prepayment stipulations discourage early refinancing of the permanent mortgage. Generally, rates are tied to Prime (Prime plus __%) for interim financing, and resemble the workings of an ARM for the permanent loan. To offset the potential higher risk of a commercial property, rates are usually higher than for residential properties.
Full Documentation type of underwriting is required, covering both the property to be financed and the person or business entity that is guaranteeing the financing. Lenders usually ask for two to three years of financials and/or Tax returns, plus year-to-date information after the first quarter of the year. If the property you are buying has an operating history, this information can play a big part in getting your financing approved. Any plans you have for improving the property are important and should be introduced as well. The lender relies heavily on the financial information provided by you and your supporting agents and professionals.

None of the information contaning in this website is intended to be tax or legal advice