Banks have the advantage of being most familiar to many borrowers. They can be useful in many situations, but for a long-term commercial real estate investment, there are often other options which are likely a better choice. Banks seek to recoup as much of their investment as possible in a timely manner, causing them to most often offer shorter terms (between 3 and 5 years).
Loan-to Value Ratios
These short terms can be useful for investors who plan to sell their property in the foreseeable future, or if they predict an event that will impact the value of their property in the next few years. Banks are most comfortable with a maximum loan-to-value of 75%, shorter amortizations (20 years is common), and their lending criteria tends to focus more on the credit profile of the borrower than the potential of the property as an investment.
An additional consideration to understand is that banks most commonly fall into one of three general profiles: national banks, regional banks, and community banks. Depending on the assets of the bank, they are regulated on how large a given loan can be; for example, many community banks can make loans up to only $1-2 million. The closer the loan amount is to their regulated limit, the more likely they will need to find another bank to participate with them. The participating lender has an additional committee which must approve the loan; if they do not, you may need to restart the process of finding another lender.
Understanding Each Bank's Process
Venture Mortgage works with many banks who actively lend on commercial real estate; however, every project is different, and it is important to understand the bank's lending profile, approval process, and if they are actively lending on commercial real estate. If a particular bank is only making one or two commercial real estate loans per year, there are numerous potential challenges that are unnecessary. At Venture Mortgage, we ensure that we understand each banks' origination process from beginning to end before our clients expend any of their time or resources.
One final consideration is that many banks require that the borrowing entity's operating account be held at their bank. For many borrowers, this is not an overwhelming concern.
- Advantageous for investors looking to sell in the next 3-5 years
- 75% loan-to-value max typical, may require borrower to move their money as well
- Amortizations are typically 20 years or less
- Banks require a personal liability guarantee for most transactions