Commercial Mortgage Loans - Loan-to-value Ratios in Private (hard Money) Lending - What Size Loan Can You Get?

I’m a commercial mortgage professional and I deal extensively in private (hard money) loans. One of the most frequent questions I am asked is "What loan amount can I get"? That’s not an easy question to answer because privately funded loans are much less standardized than conventional, institutionally funded loans so there are no hard-and-fast rules. But I speak to lenders and investors everyday and can offer the following guidelines.

Vacant Land

Private lenders don’t like raw land and **** rural land. Hard money people tend to think in terms of quick sale value, incase they (God forbid) have to take back the property. Un-entitled, vacant land is among the most difficult to sell quickly. In the event you find a lender willing to make you a deal land, do not expect to be offered more than, the lesser of, 50% of the purchase price or 50% of the collateral’s quick-sale value. If the land can’t be financed conventionally and you are looking for hard money, be prepared to put down a huge down-payment or have the seller carry-back a big 2nd.

Properly zoned, fully entitled land that has all permits in place is a valuable commodity, even in today’s difficult real estate market. Land, however, doesn’t produce income and therefore can’t cover its own mortgage payment the way a hotel or an office building can. That’s why, most hard money sources will only lend up to about 60% against land. Further, if a property owner can’t demonstrate the means to make the payment, lenders will insist that interest payments are held by a third party as an "interest reserve". In this way lenders are protected. Any interest payments not made, due to early pay-off, will be returned to the borrower.

Underpreforming Buildings

From a lenders perspective, an underperforming or vacant building has much the same problem that raw land has; not enough income. The loan amount offered by a private commercial mortgage lender will depend greatly on the extent of the vacancy and the overall condition of the building. You won’t find any lenders willing to help you acquire a vacant building unless you have a sound, well thought-out plan for leasing it up fast, and even then LTVs will be in the 50%-60% range. Partially rented facilities with at-least some income generation might fetch as much as 65%. But again borrowers will be required to have a plan in place to fill-up the space.

Income Generating Buildings

This category is the most sought-after kind of collateral for any commercial real estate lender. A lender will have a lien on the income a building produces, not just the building itself. In the event of a collection scenario, rental income mitigates the costs of a repossession action. Investors can expect to receive term sheets that reflect between 60%-70% LTV. Apartments, office and retail are highly prized assets with warehouses and self storage facilities a close behind. Industrial facilities are less attractive to lenders because, in many cases, it’s the business, not the building that’s responsible for the generating the income.

The LTV numbers above are fairly typical but are not necessarily definitive. The important thing to keep in mind when looking into hard money loans is that they are offered by private finance firms or wealthy individuals. These lenders are free to be as flexible as they wish, after-all, it’s there money. Keep these guidelines in mind, but, don’t hesitate to pitch your deal to any private lender. If the deal is strong and you can sell the merits of it, you might just get lucky and receive more than you thought you could.



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