Origination points commercial loan

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Commercial Loan – Points
Posted by: Ted Jul 26 2004, 11:20 AM
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.
Posted by: loanuniverse Jul 26 2004, 02:25 PM

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.
Posted by: ted Jul 26 2004, 10:28 PM
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?
Posted by: loanuniverse Jul 27 2004, 08:03 AM
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.
Posted by: Commercial Lender Jul 28 2004, 01:52 AM
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!
Author: Commercial Loan Underwriter