Commercial Property Types
“Commercial Property Type Categories Most Common When Assessing Mortgage Financing Options”
Property type is an important financing distinction due to the tremendous variability among commercial properties. In many cases, no two properties are completely similar which makes the process of assessing applications for funding and managing a lending portfolio more difficult compared to residential property financing.
Then, within lender programs there can be still more delineation with respect to the lending and funding criteria for properties that fall within the same category.
Commercial mortgage programs are all structured to provide financing for a certain property type. So in order to be applying for a mortgage with the most relevant lenders, the first thing you need to make sure of is if any particular lender has an interest at the present time in the specific property type your real estate falls under.
Failing to do this can result in the loss of both time and money related to the financing process, and greater financial losses if failure to fund by a specific timeline results in hard costs, penalties, or opportunity cost.
For our purposes, we will apply more of an 80/20 categorization of commercial property types to keep this discussion useful to you.
Just keep in mind that for any of the property financing categories that follow, that there can be a multitude of sub categories to consider as well and different lending program requirements for each.
Here is our list of the most common property types that we work on to locate and secure commercial mortgage financing.
First of all, every commercial property out there can be classified as either an income producing / investment property or an owner occupied property.
This relates to the buildings current use and potentially its current layout.
The current use does not preclude a different future use, but it does define the business model and means of generating cash flow for repayment that will be important considerations to a commercial lender. For instance, there are commercial lenders that will only consider owner occupied properties, others that will only consider investment properties, and still those that will consider both.
In following list of property types, there will be those that are investment only such as multi family or apartment, and others that can be either investment or owner occupied or both such as mixed us. So its important to not only understand the classification of a given piece of real estate, but also the type of use.
Multi Family Unit – Apartment Buildings. For multi units 5 units or greater, the property financing solutions fall under commercial lending. Where there are four or fewer units, the mortgage financing is typically provided through residential funding programs. Apartment buildings can also qualify for insured mortgages with the lower rates going to lower loan to value applications.
Mixed Use Properties. To be considered mixed us, a property has to be zoned for both residential and commercial use. Where the majority of the space is residential in usage, there can be financing solutions from some residential lenders. All other mixed use financing solutions will come from commercial lenders.
Office Buildings. Most office buildings are investment properties that provide leased space to office tenants. The keys to this type of financing is the length of the leases and the quality of the tenants in terms of their financial strength to make payments on a timely basis through out the lease term.
Retail Buildings and Strip Malls. For this category of investment property, tenant financial stability is also going to be very important to attract lower rates of interest. When there are a lot of small businesses existing as tenants in a particular application, the lender can require financial reviews of the tenants as well as the borrower to provide a better assessment of the borrower’s ability to service debt and the risk of not being able to service/
Commercial and Industrial Condominiums. Business related condos have become more and more popular over the years providing more market strength to support lending values. This has opened up the number of financing options to include both cash flow and more equity based mortgage solutions. These units can be financed as investment properties or owner occupied real estate.
Hotels and Hospitality. This particular category is very closely tied to the economy where funding can be difficult to locate in times of low to negative economic growth. Hotel financing is greatly helped by strong brand recognition, national marketing, financial performance, condition, and location. There are times when “A” credit options are difficult to obtain requiring sub prime commercial mortgages to be considered in the short term.
Land And Property Development. Bare land and site development financing is a separate financing requirement from what the actual end use of the property will be. The keys to this type of commercial property financing is the strength of the market, the location of the property and its potential uses, and the amount of equity that is available to secure the lender. Development that adds incremental value to the property can also create higher borrowing amounts.
Specialty Properties. This is a good example of a property type that has many subcategories within it. Properties such as gas stations and self storage facilities would fit here. Each specialty property type has its own unique financing requirements that need to be understood and met before any type of commercial mortgage financing is going to occur.
If you would like to get more information on the financing requirements for a particular property type and/or would like to better understand your commercial mortgage financing options for a specific property, then I suggest that you give me a call so we can set up a time to go over your situation, get all your questions answered, and discuss the different lending strategies that are most relevant to you.