Obtaining commercial real estate finance isn’t what it was a handful of years ago. As a result of the financial crisis, new rules on commercial real estate lending have emerged. These rules and the metrics that are mandated by them have created challenges that have never existed before.
Required Debt Service Coverage ratios are higher, advance rates are lower, and amortization periods are shorter than before the financial crisis. Certain classes of real estate have, such as hotels, have always been challenging to finance. They are both operating businesses and real estate. The transitory nature of their customers and corresponding volatility of cash flows require higher coverage ratios than other commercial real estate. The common use of Franchise Agreements necessitates a comfort letter to the lender from the Franchisor due to the non-assignability of the Franchise Agreement. The need for a management company and management agreement generally necessitates the execution of a Subordination, Nondisturbance and Attornment Agreement (SNDA) to protect the management company from immediate termination in the event of foreclosure.
CRE finance is starting to show some improvement, but remains tight. Hotels remain challenging, especially for unflagged properties. And the pool of players in CRE lending was never very large.
New rules have emerged and new financial models have been developed that effect credit availability from commercial banks. Some of the effects are:
Higher required Debt Service Coverage ratios
Higher required cash reserves
Longer appraisal times
Lower advance rates
There are still markets where 60% advance rates on FMV, and required DSC ratios of 1.4x or better prevail. But there are oases of liquidity in commercial real estate finance.Talk to us if you need financing of seven figures or greater.