Maximum Leverage? Looking at Loan-to-Value Ratios by Property Type

loan to value ratios

Note: In this article, we hear from guest contributing blogger Kip Dunkelberger (kdunk@venturemortgage.com), the President and CEO of Venture Mortgage Corporation.  Kip leads this trusted, dynamic commercial real estate mortgage banking firm, and he himself is known as an experienced and resourceful problem solver in the realm of commercial real estate financing.  

Loan To Value Ratio

When it comes to purchase financing or refinancing for commercial real estate, it is important that borrowers keep an eye on the LTV, or loan-to-value ratio, of the subject property to avoid unpleasant surprises at the time of origination. Imagine, for instance, that you own a property you assume is worth $5 million, and you’d like to refinance at an 80% LTV, providing you $4 million to pay off any existing loans and perhaps cash-out above and beyond the outstanding balance. However, when you sit down with your lender, they assess that your property is worth just $4.3 million, and they are only comfortable with a 70% LTV for a loan amount of $3,010,000, nearly $1 million less than you’d planned.  If you’re looking at an outstanding loan balance on the property of $3.5 million, you could be in a situation where you’d need to bring cash to close rather than cashing out.

Lenders evaluate commercial real estate largely based on the current and potential income generated by the property, the ease of finding replacement tenants (as applicable), and the degree to which the property is stabilized. With that in mind, let’s take a look at several property types and the general LTV ratios you can expect from potential lenders.

Remember that each piece of commercial real estate is a unique entity, and loan-to-value ratios can vary for a number of reasons: the examples below are presented in good faith only as general guidelines.

Multifamily

Multifamily properties have the distinct advantage of having tenants that are relatively easy to replace in the grand scheme of things. A single-tenant industrial building has a very limited, specific market of potential tenants, making it a riskier proposal in the eyes of a lender than a stabilized apartment building with thousands of potential tenants within a 5 mile radius on any given day. Therefore, owners of multifamily commercial real estate enjoy some of the highest LTV ratios in the market, and can push this ratio up to 85% in some cases, though 75 to 80% is more common.

Specialty/Recreational Properties

The income potential for these properties is largely seasonal and can be volatile, which can cause some lenders to be reluctant to lend on this type of commercial real estate at all. That is not to say all hope is lost: there are several lenders who are familiar and comfortable lending on these properties, and a commercial mortgage banker is a good option to assist borrowers in assessing the lay of the land in sourcing capital for these loans. However, because of the potential swings in income and the risk of drastic changes in the operating stability of these properties, borrowers should expect to see a cap of 50% LTV. Some very stable assets with a long history of good operation (and the documents to support such a history) could possibly push the LTV higher, perhaps to 55 or 60%, but that is relatively rare.

Borrowers should also be aware that valuation of these properties tends to be quite conservative, which could further reduce the potential loan size.

Retail (Strip/Center)

The retail sector of commercial real estate has seen some challenges in the past decade, but remains in relatively high esteem in the eyes of most lenders. It should be noted that retail centers are valued more highly (and have the corresponding higher LTV potential) if they contain one or more national, stable tenants (i.e., Walgreens, AutoZone, Caribou Coffee, Toys R Us, and the like) who will increase customer traffic for the lesser-known tenants and are unlikely to abruptly vacate or go out of business. Lenders also like to see leases with many years remaining for each tenant at the time of origination, which assures them that a property that is currently operating well will not lose half its tenants shortly after closing, and the higher the occupancy rate, the better. A stable retail strip center with low vacancy and good tenants can expect about a 70% LTV ratio, with very well-performing properties able to reach closer to 75% LTV.

Triple Net Leased National Single Tenant Retail

Perhaps the holy grail of leases, the true NNN or triple net lease obligates the tenant to be responsible for taxes, insurance, maintenance, capital expenses, and any other operating expenses associated with a subject property. The owner, in essence, only collects rent and pays the debt service to the lender. When combined with a long lease and a national, publicly traded company as the tenant (Wal-Mart, Best Buy, Aldi, Nordstrom, etc.), lenders are quite comfortable with LTVs up to 85% for these properties; in some cases, special loan programs offer the opportunity for a 90% LTV if the tenant has an especially good credit rating.

Here, we’ve looked a just a few of the many property types in commercial real estate and the range of loan-to-value ratios for each. We’ve explored the reasoning behind the LTV spectrum from the lender’s perspective, and we’ve advised that seeking a consultation with an experienced commercial mortgage banker can provide you with advice regarding the best lender for your property type, situation, and objectives. When it comes to commercial real estate financing, remember that tenants and cash flow are keys to a stabilized, well-performing property that makes lenders comfortable with a potential investment and allow borrowers to maximize their leverage. 

If you have questions about obtaining a mortgage or financing for a reverse exchange or any other commercial real estate investment, you are invited to call Kip Dunkelberger at (952) 843-5125, or email him at kdunk@venturemortgage.com.

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