Board Topic: Equity Line on Credit on Commercial R.E. Converting Equity to working capital
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Equity Line on Credit on Commercial R.E.

Posted by: Bill Feb 27 2004, 11:51 AM
I own a commercial property and my business occupies 50% of the building. current value of property is $1.3 million and have $600,000 of equity. I am looking to pull out some of the equity for working capital, approximately $50,000. Where would be the best source and how can I go about it?


Posted by: loanuniverse Feb 27 2004, 12:25 PM

Well, I could not really tell you which way to go without knowing the terms of your current loan {“rate, amortization, amount of time left, prepayment penalty, etc}. Therefore, I am going to give you a couple of scenarios.

Before that let me do a little math…

$1.3MM - $600M = Your current loan is $700M
$700M / $1.3MM = Your current loan-to-value is 53.9%
Using 75% loan-to-value you can probably borrow $975M or $1,040M at 80% { assuming there is enough cash flow and rental income to cover the debt service }

Now to the scenarios:

Scenario #1 You refinance the existing loan and add the additional money to the new loan. Pros: You could probably end up saving some money on the long run if you can get a better rate. Cons: your existing loan might have a prepayment, if the original appraisal is a little dated you would need to get a new appraisal, which means a couple of thousand for commercial properties.

Scenario #2 You get the same lender or another lender to give you a second mortgage on the property. If you decide that you want to keep the first mortgage then you can probably get either the same lender or another to give you a small loan without the need of an updated appraisal. Since most lenders have the flexibility of not requesting an appraisal on loans of that amount if the value can be supported in other ways.

A couple of things:

a> Since you are looking for a line of credit, you might as well go for one for more money. Instead of $50M, request one for $100M. The difference in fees might be a few hundred and will give you more flexibility. You do not need to borrow the money.

b> Do you have a holding company for the real estate apart from your operating company? Who do you want it to be the borrower? How is the operational cash flow of the borrowing entity? Depending on the answers, the loan is underwritten slightly different.

c> The only problem that I can see is if your operating company is having trouble with its cash flow. The thing is that no matter how you underwrite it the cash flow from the operational company is either 50% of the source of repayment or the total source of repayment.

Good luck, hope this helps.

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