By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
Owners looking at retail property loan options have a broad range of potential programs as this is one of the preferred building types by capital sources. This is a huge category of building types, consisting of single or multi unit, neighborhood retail, big box retail, etc that is further divided by it’s occupancy, ie owner occupied or investment. On the investment side the structure of the leases (NNN to modified gross), and strength of the tenants themselves (credit grade to single location “mom and pop”) makes a difference to what finance options are available.
General Underwriting Restrictions On Retail Property Loans
Below is a quick break down of underwriting guidelines within this property type.
Loan To Value
Loan to value restrictions on retail property refinances are normally capped at 90% for owner occupied buildings and up to 70% on investments. The SBA 504 program, SBA 7a program and conventional bank loans are our main options on owner user type transactions. Investment financing for retail properties, is more limited at 65% to 70% loan to value, with few exceptions.
Retail Loan DSCR
Debt Service Coverage Ratio restrictions are typically set at a 1:1.2 for this building type. Meaning that for every $1.20 of net income (income after taxes, insurance, repairs etc) the property produces, the mortgage payment will not exceed $1.00. Said in another way, after all expenses and the mortgage have been paid, the owner will need to net $.20 to qualify for the best loan programs.
Exceptions can be made on this rule for retail property loans. For example, investment properties with a AAA corporate guaranteed leases, can see DSCR’s as low as 1.05.
Tenant evaluation is important within the retail property category on investment loans. Lenders scrutinize the time left on the current leases and other relevant information, such as the financial health of the tenant. Often, lenders will not want to have the fixed period of the loan to exceed the time left on the current lease.
Market value and market rent is important and will be evaluated and compared to the subject property. Age, appearance, location, accessibility, and local market conditions, as well as other factors are considered.
The personal credit worthiness of the borrower will be examined. 680 credit score is normally the minimum for the best finance options. Exceptions can be made on this as some conventional lenders will consider scores as low as 600. The overall strength of the property, tenants, net worth, DSCR, and LTV can offset concerns of low credit scores.