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Robert Young, Principal Commercial Capital Group

Alternative Financing for Turn Around Properties


There is much glitz and glamour in reading about the many large real estate transactions that take place each month. The story about the $50MM apartment building or $100MM office complex. These transactions are taking place at the elite levels of the economy, with well-seasoned borrowers and investors. Like the economy however, it is the small business and investor that are the engine to keeping us moving forward. There is a strong lending market currently for performing assets such as multifamily, office and retail; but what about the opportunity to take advantage of a turnaround situation? What about the chance to take over a poorly managed property in a hot market, to reap the significant rewards of making improvements and leasing it to new tenants at higher rental rates? What options are available to make this goal a reality? I’d like to highlight a few: Bridge Financing: This is short term, collateral based financing that allows a borrower to gain access to money needed for purchase and/or renovation. Most bridge lenders look to the asset type, location and sponsor when basing their decision, as opposed to cash flow analysis. The exit strategy is of great importance and the lender’s comfortability that the sponsor can fulfill their plans to eventually pay off the note. These loans are typically a more expensive source of capital due to taking on riskier projects. Loan size often starts at $1MM with 1-3-year interest only terms and average rates ranging from 8%-12% plus 2-5 points. Upon stabilization of the property, a borrower can then secure lower rate traditional financing. Stated Income Loans: These are loans that typically don’t require analysis of prior financial statements or tax history. Rather, these loans require documentation such as bank statements or other financial records that show household income and cash flow. There are also lenders that rely mainly on the asset for security and the sponsors credit history to gain approval, often with more leniency than conventional banks. This is a nice option for entrepreneurs looking to enter real estate investment or those with a less than pristine credit record. These loans amounts can generally start as low as $250M and go up to $5MM. The benefit is that while it may be a slightly higher interest rate, it is structured like a conventional loan. There are 30 year fully amortizing options with fixed rate periods available. Prepayment penalties mirror the fixed rate allowing for the loan to be refinanced in several years. Seller Financing: Depending on the loan-to-value a lender is willing to provide for a purchase and the amount of equity a sponsor has to inject, there may sometimes be a gap that needs to be filled in order for the transaction to work. This is where seller financing can be very useful. The seller may accommodate such a request since they are getting a large sum of money up front and also have the ability to earn interest on the seller note over a period of years. Many times this becomes a win-win situation for both parties. Every real estate situation is unique and all options should be considered when making a purchase. The cost of capital for the project is thus all relative to the expected return on investment. If the final result is significant cash flow on a newly leased building or substantial increases in asset value; the ability to secure the financing up front is an important contributor to achieving these results. Robert Young is Owner/CEO of Principal Commercial Capital Group.

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