Post Covid Office Metrics

Charles Pope, Certified Commercial Lender

In the new economy, post covid, there will be changes to this market. There will be a short term increase in money spent on tenant improvements (TI), which will be amortized through long term interior finish loans. This will result in an overall increase in NOI. Of course, their will be an accompanying correction to cap rates. How will this work?

For two reasons, there will most certainly be vacancies: 1) Small to medium businesses (SMB’s) will reel in expenses as product demand decreases. As employees are more comfortable working at home, this will become standard for many, allowing many of these small businesses to survive.

Working at home, a new norm for some.

2) Medium to large Business’s that need the centralized workforce will have to lease more square footage.

The tenants necessarily will have to abide by the new rules on social distancing and safe work places. Now that there are fewer tenants, but with larger spaces, management fees will be lower on a pro rata basis which, in turn, will increase NOI. Of course, the larger tenants will negotiate lower square foot rates. The outcome of this will simply be, as it always is, supply and demand.

Post Covid Layout Sample

For those of our followers who find themselves in the office space re-do mode, we are excited to offer these loans at a 10 years, or the lease term, whichever is less. Whereas many banks are unable to perform on these requests due to the current default rate and deposit runoff, GPA Capital is here to help – as we always are. Click here for our initial [Application Request].

Interior Office Expansion

State of Today’s Bank SBA Loans

Our recent anecdotal evidence shows that there is a logjam with most banks due to the overwhelming amount of disaster relief applications.

The Washington Post spelled it out in their interview with Small Business Administration director who blasts banks over failure to quickly distribute loans. Nevada district director Joseph Amato criticized big banks for failing to quickly distribute loans to small businesses during a web presentation posted on April 6 and later shared with The Post. GPA Capital works hard to vet our bank alliances – we know the performing ones.

Some bank lenders, as well as private equity funds, have put a hiatus on lending as they are analyzing investments in view of the proposed recovery. Will the recovery be “V” or “__”? Whereas this may be perceived as bad news, the good news is that GPA Capital has been reaching out through its network to bring lenders back to the table for well structured, self liquidating loans. Meaning, a strong exit strategy using strong compensating factors. Call us to discuss 877-247-2776. In the meantime, here are 8 things to consider to improve your funding chances.

Oil & Gas Industry – Future

Recently we’ve heard market watchers tell us that the oil & gas future is uncertain. We challenge that attitude as evidenced by our success in financing our oil & gas clients. As most elements in business and finance, in general – it all has to do with supply and demand. The demand for oil is not going away. Travel may be weak at this time, but this is overtaken by the strong demand for the other products made from a barrel of oil – such as PPE, to name one in current demand. To the point that a picture is worth 1,000 words, please see below:

If you are an independent oil & gas producer, we can help you. Please call us at 877-247-2776.

Not for Profit Lending

Not for Profit Organizations have no shareholders, show no excess cash to be used for debt service, therefore can’t show a debt service coverage ratio and report to the IRS on form 990 instead of 1120.

Most of these characteristics are not too well understood by traditional lenders, thus, GPA Capital is frequently called upon to advise. Of course, we make full use of a select numbers of Commercial Banking Alliances, as well as our Private Equity Partners.

Not having shareholders takes away the crutch that most lenders have of relying on a guarantor; there are no guarantors. This means that the underwriter (in this case, GPA Capital) must rely on the Non-Profit itself for the payback.

Having zero income does not mean “no capacity of payback”. This simply means the underwriter has to have a working knowledge of the CAFR, a Comprehensive Annual Financial Report; a set of U.S. government financial statements. By way of definition, this opens up scrutiny of Statements of Net Position and, important for debt service, Statement of Activities. Are the funds of the Not for Profit Major Funds, and, if not, where do the categories stack up? Are the assets designated?

For these reasons, if you are at Non-Profit AND, you do not have access to a tax base or other municipal funds, bond funds or special charity forums, you will be well served to give is a call. 877-247-2776.

Learn 5 C’s of Lending

As Commercial Loan Advisors we can assertively tell you that by understanding the fundamentals of how your debt source analyzes potential loans, you become a much more formidable borrower. This will enable you to utilize your leverage to your best advantage.

We put together this informative eBook that is part of a 5 part series to bring you current with the state of the borrowing industry and how you might leverage your resources to improve your practice’s financial situation. The Five C’s Whitepaper, Educational Series 1 of 5. Enjoy!

Commercial Appraisal Help

A commercial real estate appraisal differs quite a bit from appraisals done for residential properties. Value for a commercial building is based on the rentals received relative to the expenses paid out. The underlying asset is important, but not even close to the same way that a residential properties value asset.

In recent months our loan clients have asked many questions on how their property, and/or acquisition will be affected by the occupancy. The answer is: NOI (net operating income) means everything!

I can speak to this with some authority as I ran the appraisal department for my first employer – a regional bank. A commercial appraisal still contains the 3 value approaches (direct market comparison, cost reproduction approach and the income approach). As most things in business have to make sense the underlying premise is that there is no intrinsic value to an income producing property than the earnings stream. I could write an epistle, but, for brevity and time savings, here’s what you’ll focus on. Feel free to email me with any questions about your property. charles.h.pope@gp-assoc.com

Key factors will be:

• Longevity of leases

• Diversity and continuity of income

• A tenant with a disproportionate percentage of space must be carefully evaluated

• Each tenant will be looked at for credit standing and an estimated of future performance

• Environmental survey and any remediation that must occur

• Engineering report to identify deferred maintenance

• Reserve for replacement from said engineer.

Operating expenses? One important component to value!

Operating expenses are the costs associated with operating and maintaining a commercial property such as an office building or retail center.

Depending on the lease structure, you will either pay operating expenses as a component of gross rent or in addition to base rent. In the Austin market, triple net (NNN) leases are typical for Class A and B office space, and operating expenses are paid on top of the quoted NNN rental rate.

In a multi-tenant building, each tenant typically pays their pro-rata share of operating expenses based on the size of their space relative to the building, whereas in a single-tenant building, the tenant is typically responsible for 100% of total operating expenses.

What is included in operating expenses?

Operating expenses are made up of three main components:

Property Taxes: The taxes charged to the property owner by taxing entities. To learn more about how property taxes are calculated in Austin, read our article: What are Commercial Property Tax Rates in Austin, Texas.

Insurance: Insurance is the cost for the owner to ensure the building, which is typically required by the lender that is financing the property.

Common Area Maintenance fees: These expenses typically include management fees, building maintenance and repairs, utilities, administrative fees, management salaries and fees, property lighting, parking lot maintenance and more. Exactly what is included varies by property type and by landlord. Get more information on what is included in CAM fees in our article What Are Common Area Maintenance Fees?

What isn’t included in operating expenses?

Operating expenses should not include debt service, CAPEX, property marketing costs, capital reserves for future large repair projects, leasing commissions or tenant improvements allowances.

Is op/ex negotiable?

Typically, the the property tax and insurance components of operating expenses are not negotiable. These items are considered uncontrollable, and, therefore, they are passed directly through to the tenant. 

Controllable expenses, such as CAM expenses, are negotiable to some degree as landlords and property managers can control how efficiently a building is being managed. Negotiating a cap on annual operating expense escalations is the most common form of tenant protection.

How do operating expense caps work?

There are three ways to cap operating expenses:

Year-to-Year Cap

In a Year-to-Year Cap (also known as a Non-Cumulative Cap), there is a cap on the percent that the landlord can increase the CAM year-over-year.

Example:

With a 3% Year-to-Year Cap, if the CAM increased by 2% the first year, the tenant is responsible for paying that 2% increase. 

If the next year, CAM increases by 4% the tenant is responsible for paying only a 3% increase, as they are protected by the Year-to-Year Cap.

For this reason, tenants prefer year-to-year caps, as it keeps CAM increases to a predictable level.

Cumulative Compounding Cap

In a Cumulative Compounding Cap, there is again a cap set on the percent that the landlord can increase the CAM each year. However, in this situation, the landlord can always recoup any unused increases from previous years. This is the most common form of operating expense cap.

Example:

With a 3% cumulative compounding cap, if CAM increased by 2% in the first year, the tenant is responsible for paying this 2% increase.

If the next year, CAM increases by 4% the tenant is responsible for paying this 4% increase because the landlord can collect the 3% cap for this year and the leftover 1% from last year.

For this reason, landlords prefer cumulative compounding caps, as it allows maximum flexibility.

Loans Properly Structured

An important understanding when seeking loan capital is that “there is never a shortage loan funds/capital, only a shortage of properly structured transactions.” As so many borrowers lose hope of receiving the funding they need. They go from one lender or loan broker to another, looking for someone who has a magic wand – sorry to break the news, that does not exist. The good news, however, is that when properly structured, a solid loan transaction will reveal itself – many times not in the fashion you expected, but more than likely, an even better solution.. Therefore, we created this brief, but informative White Paper for our readers in an effort to save you the pain which comes from not being in the capital markets daily, as we are.We look forward to serving your capital needs for your new office, acquisition, expansion or refinance. Simply complete this short form [Inquiry] to set up a complimentary cash flow evaluation. 8 Things Small to Medium Size Businesses Should Know About Loans white-paper

Bank-Loan Turndown? Hard Money Isn’t the Only Option!

What do you do when you are declined for a commercial mortgage loan at a bank? This is a question most borrowers are going to face at one time or another, since there are many small-business owners who will not qualify for traditional financing.

It might seem that after a bank turns down a loan request, a borrower’s options are very limited. To some, hard money might appear to be the only alternative.

In fact, this isn’t the case. Although some borrowers and commercial borrowers are going to be limited to hard money loans because of poor credit, seasoning issues and a variety of other factors, there are plenty who can qualify for a mortgage that combines the characteristics of bank and hard money loans. It’s important for the borrower to seek competent help brokers to understand their options from a professional loan consultant.

Hard money defined (some lenders like to make it sound less onerous by calling it “private money lender”) 

Hard money loans are a type of asset-based financing through which you receive funds secured by a commercial property, generally at a high interest rate. These loans are typically interest-only products and tend to be short-term solutions — one or two years — with a balloon payment at the end.

Borrowers requiring a hard money loan often have experienced a distressed financial situation, such as a bankruptcy or foreclosure, which has damaged their credit. Interest rates are usually at least 12 percent and can often be much higher because lenders are taking on more risk with a hard money borrower’s situation. The other costs of a hard money loan also tend to be higher, with lenders charging as much as 10 points to close the deal. Many brokers prey on distressed borrowers.

Hard money loans aren’t cheap, but they do fill a void in the small-balance commercial mortgage market. So, it’s important to be able know what you will qualify and to select the right hard money lender.

When Hard Money Works

If your credit scores are particularly low, a hard money loan might be the only option. Hard money loans can be a way for borrowers in financial trouble to obtain the funds they need while reestablishing a positive payment history.

Seasoning issues also can keep a borrower from qualifying for a mortgage from a bank or some private lenders. Generally speaking, if you have owned a commercial property for less than two years, you will run into issues with seasoning. In this case, a hard money loan could be the right solution as these types of lenders usually don’t have seasoning requirements.

Borrowers who need a bridge loan and are planning to sell their property to pay it off also are potential candidates for hard money financing. Bank loans and some private-money mortgages are usually longer-term loans with prepayment penalties, so a hard money loan that can be paid off quickly without incurring additional fees may be the best fit.

Another case in which you may need a hard money loan is for a purchase-and-rehab property. Few banks are willing to provide financing to borrowers looking to rehabilitate small commercial properties, and even many nonconforming lenders shy away from these situations. If your borrower is looking to purchase a commercial property with the intent to fix it up and sell it, a hard money lender is going to be a good source for obtaining the necessary funds. Alternatively, as GPA Capital has, you might consider a Non-Bank Institutional Lender.

Finally, for some borrowers who need a commercial mortgage in a very short time frame, waiting for a bank loan to close simply isn’t an option. Commercial hard money lenders are known for closing deals quickly and, in the right situation, a borrower will think it’s worth the extra costs.

Hard money loans are a great option for some commercial borrowers. There are other options, however, for small-business owners who cannot qualify for bank loans but are looking for something relatively inexpensive and stable.

For the borrower between a bank and a hard money place, there’s another option: Pursuing the alternative.

Nonconforming commercial lenders with rates and terms in between those of banks and hard money lenders are a great option for many small-business owners looking to refinance or purchase a property. This niche is still relatively underserved, but there are lenders who are willing to work with non-bankable borrowers and their commercial mortgage broker to create long-term financing solutions that benefit all parties involved.

Your credit history is going to be an important factor. If your credit score disqualifies you for a bank loan but may not necessarily low enough to necessitate hard money financing, you could obtain an alternative nonconforming commercial mortgage. It’s also important to note why your score’s too low for bank financing. If your history has recent late mortgage payments, you’re likely only be able to obtain a hard money loan. Credit issues stemming from medical emergencies or financial problems unrelated to their business, however, are obstacles that some we can work with.

If you’re looking for long-term financing, a nonconforming commercial mortgage with the right lender is a great choice. For many borrower’s hard money loans, which require a fast exit strategy as the loans tend to balloon within two years, do not provide the longevity for positive, measured growth. For borrowers seeking a more secure and consistent financing option, an alternative small-balance commercial mortgage could be a good solution.

Commercial mortgages from nonconforming lenders also can function as an exit strategy for you if you currently have a hard money loan. Once you have reestablished a positive payment history and improved your credit, you’re more likely to qualify for one of these in-between loans with our services. Refinancing a hard money loan with an alternative small-balance commercial mortgage will put you on more secure financial footing.

• • •

Although there are some commercial borrowers who will require hard money financing, there are nonconforming lenders with alternative products that will be a better fit for some borrowers. Understanding our non-bankable borrowers and the type of commercial mortgage that suits their needs allows us to create a sound borrowing strategy for our clients.

The Lending Equation

Common Sense Commercial Loan Criteria

Character. This is demonstrated by credit and most recently, credit score. Have you paid your bills in the past? Judgements? Percent debt against credit lines greater than 30%?

Capacity to Repay. This refers to the actual ability of the borrower to repay the debt and how this will be done. This can be from the earnings from a business, cash flow from the investment property, or, the sale of the investment property. It could even be a forward commitment from a long-term lender in the case of the initial loan being short term.

Collateral. Collateral is what will be liquidated should the borrower not pay the loan when due. Note: the lender requires a margin above the loan amount to cover collection costs should it come to that.

Liquidity.  This is what the lender considers “Plan B”. In case the primary means of payback fails, you need at least “interest carry” in the bank until the situation is corrected. NOTE: this can also be satisfied in some cases by stable and substantial earnings of the borrow. Either from his/her “day job” or proven by historical tax returns where assuring the continuity.

“Skin in the deal”. The lender wants to make sure the borrower is taking great care of the collateral, doing everything possible to assure the project’s success. There is no better way assure this than the borrower’s hard cash investment in the project/property/collateral.

Conclusion: Whether a hard money loan, conventional, conforming loan, hybrid or alternate conforming loan, one or more of the above “always” come into pay. When the loan is reviewed by the lender, the transaction must make sense. Some new investors have been taught there is 100% hard money available. It does not fit into the equation since it costs 35% of the asset value to foreclose for non-payment. Thus, the maximum loan to value is 65%. Make sense?

If one of the above is weak, a strong “other” may compensate making for a loan approval, again, make sense?