- Conventional commercial loans are flexible mortgage solutions that are provided by a bank, credit union, or savings institution that can be used to finance a range of commercial properties. Both novice and experienced commercial property owners may use these loans as the first-lien financing on a commercial property.
Conventional Loan Highlights
Eligible Properties: Multifamily, Office, Retail, Warehouse/Industrial, Hospitality, Medical/Healthcare, Self-Storage
Loan amount range: Minimum $1,000,000
Interest Rate: Fixed rates vary. Floating Rates from 2.30% over LIBOR. See current LIBOR rates.
Loan Term: 3 to 15 years
Amortization: 10 to 30 years
Maximum LTV: 80%
Minimum DSCR: 1.20x
Minimum Debt Yield: 7-8%
Recourse: Can be non-recourse, limited-recourse or full recourse.
Prepayment: Can be no prepay penalty, step-down, or flat-rate.
Advantages of Conventional Loans
- Finance Distressed Properties: Since the loans are normally underwritten not only on the basis of a property but also on account of a borrower's personal guaranty.
- Available To Inexperienced Borrowers: Available to those who have strong financial positions, as they can rely on their personal guaranty more than their experience during the application process.
- Loan Size: Available for less expensive properties that don't require borrowing a large amount.
- Faster Underwriting: Conventional loans are faster to underwrite than government-backed loans that must go through a federal agency.
Disadvantages of Conventional Loans
- Requirements: Borrowers normally must have a good credit score and sizable post-closing net worth and liquidity in order to meet the personal guarantee requirements.
- Personal Liability: Full and partial-recourse conventional loans leave borrowers personally liable if a loan goes into default.
- Fixed Interest: Often comes with shorter fixed interest rate periods than commercial mortgage-backed security loans (CMBS) loans offer.
What Are Conventional Bank Loans?
Conventional commercial loans act as a primary lien against a financed property, and the time frame is usually medium- to long-term. In many ways, these loans offer a straightforward way to finance commercial buildings.
The conventional nature of these loans means that the loans don t have special considerations. For example, they aren t backed by a government agency (e.g. the Federal Housing Administration, the U.S. Department of Agriculture or Veterans Affairs). Other outstanding circumstances typically don t apply.
What Commercial Properties Are Conventional Commercial Real Estate Loans Well Suited For?
Despite their conventional nature, conventional commercial real estate loans are quite flexible and can be used to finance many different property types. Owners of multi-family, single-family rental portfolios, retail, office, hotels, and industrial properties may use these loans. Moreover, the loans are well-suited for inexperienced borrowers because they're fairly simple and straightforward.
In some cases, conventional loans are also used to finance distressed commercial properties. This is possible because the loans often have a personal guaranty (see Features section).
What Terms Do Conventional Commercial Real Estate Loans Offer?
Although conventional commercial real estate bank loans are fairly straightforward, their terms can vary since no government agency oversees these loans. Terms may vary depending on property type and the lending institution. The following generally holds true for these loans.
Most conventional loans come with loan-to-value ratios up to 75 to 80 percent.
While the official duration of these loans is often 5 to 10 years, property owners commonly refinance before a loan fully matures. The interest rate is frequently only fixed for a few years, after which a balloon payment or variable rate might kick in. It s when the fixed rate expires that property owners commonly refinance.
The amount borrowed through conventional loans encompasses a wide range. In particular, these loans can be underwritten for smaller loan amounts than what other loan options offer.
What Features Do Conventional Commercial Loans Come With?
Conventional commercial loans come with many features, but there are three prominent ones that borrowers should be aware of:
Personal Guaranty: The vast majority of conventional loans require a personal guaranty, and borrowers must have the net worth and creditworthiness to qualify for a loan. The personal net worth of a borrower frequently (but not always) should be at least equal to the borrowed amount. Depending on the exact nature of the personal guarantee required, these loans may be either full-recourse, partial recourse, or non-recourse. (A personal guaranty might not be required in select situations, in which case the loan would be non-recourse.)
Prepayment Penalty: Most conventional loans come with a prepayment penalty, which may be structured as a flat rate, or step-down (declining) penalty. Step-down penalties are most common on shorter loans. Longer-term conventional loans are more likely to have a step-down or flat-rate penalty.
Loan Assumption: Many conventional loans are usually assumable for a fee, which most often comes into play when a financed property is sold. Assumption allows a buyer to replace the seller as the guarantor of the original loan when purchasing a financed property. It can help eliminate prepayment penalties, and may also give a buyer access to a more favorable loan than would otherwise be available at the time of purchase.