I have a commercial property that is about half full. The property needs to be updated - paint, parking lot, HVAC, landscaping, etc. - The principles (my brother and I) have excellent credit. The lowest appraisal will probably be around $1 million. We are looking for $500k for the rehab. What can we expect to pay for points and what are rates on a 15 year term? There is no current debt. Net cash monthly is five to six thousand dollars.

Ted:

You are probably looking at a 1% fee {give or take 50 bps either way}

For a fully amortizing 15-year term loan, you are looking at anywhere from 6.75% to 8.75%.

The problem that I see here is repayment. Let me illustrate it with some calculations. Lets say you get a $500,000 fully amortizing 15-year term loan at 7.5%. Your annual payment is $55,976 {remember that commercial loans use a 360 day year not 365}. You are telling me that the “net cash monthly is five to six thousand dollars”. I am going to assume that you mean NOI is $5M to $6M a month. At $5,000 this translates into $60,000 NOI a year.

$60,000 / $55,976 = 1.07X Debt Service Coverage Ratio

This is not enough, as most lenders will like to see a 1.25X DSCR or better.

Thanks so much for the information. Given what you wrote, how should I look at a lender who is willing to give me the loan, for three points? Is this simply a factor of my shakey situation which would put a more conventiaonl lender - and a more conventional fee - off?

Three points is a big fee, however the rate also has to be looked at. In your position, I would run the numbers myself to see the amount of loan that the cash flow can support and shop around.

3 points on a 500K loan do sound a bit much. U are most likely dealing with a point happy broker. Try dealing directly with a lender and you may be charged a point or none. A 15 yr adjustable option is ok and a 15 yr fixed will give you a much higher rate. I would stay away from the longer fixed. If you have all the financials, a good option for you may be a full doc loan with a 30 amortization. If paperwork is an issue then look for a stated loan from a comany with loger amortozation than 15/20. i.e we give our clients a 3/27 option where the amortization is based on a 15 year program for the first three years and then at he end of the 3rd year the payment is based on a 27 year amortization. Also, Admin is correct in the debt service analysis. Every commercial lender will require an industrial/office property to be a meet a min debt service, which is usually 1.2+ Hope that helped!

I see that 1-2 points may be typical for a loan for this amount, but what my shop is currently working on a $10million deal. What would be a typical amount of points charged on that?

The loan amount has little to do with the amount of points that should or could be charged. Rate and points depends on risk, this is true for all lenders. Although in residential lending Jumbo loans typically carry higher costs, this is because there is a greater risk to the lender for the loan amount, in commercial lending higher loan amounts do not translate into higher costs.

The greater the risk the higher the costs, if you are looking at a strip mall with full occupancy and a borrower with strong credit and financials, you would be lucky to get away with a full point. If you are looking at a vacant motel with a borrower who has been turned down by every conventional lender out there, you would be lucky to keep him under 7 points or more.

This is obviously simplifying the matter, there are various other factors that can contribute to costs of funds, but for the most part you could look at a deal, see it's risks and determine costs.

I have a lender that can do 20 year or 30 year term.