Businesses Getting A Mortgage, Post Covid 19

Small business owners and commercial property investors looking to finance their properties have many things to consider, especially if they are unable to get a bank loan. Covid 19 and the ensuing economy has created an overabundance of “risk aversion” for commercial banks. It’s important for borrowers to understand what their options are, how to leverage those options, and how to protect themselves when seeking financing.

GPA Capital Approves

Hard money, everything else being equal, should not be your first choice after a bank turndown – low loan to value, high costs and onerous terms. Moreover, if you are seeking more reasonable terms for your borrowed funds, you’ll need to look at: credit, collateral and capacity to repay.

Whether you’re dealing with past credit issues, an inability to verify your income to a bank’s satisfaction, or simply need a commercial mortgage faster than a bank can provide, non-bank commercial lenders are a great resource for non-bankable borrowers. These lenders understand alternate documentation, how to support the decisions being made that make sense but are not necessarily confined by federal banking documentation requirements. An example of this is accepting bank statements showing revenue as opposed to tax returns.

This is also an opportunity to “fine-tune” your business, making sure you have your sales and marketing up to speed, that you not only have continuity of income but diversity as well. Any good consultant will also review your business in view of industry standards and current trends to assure that you have not missed anything.

Borrowing Havoc = Cashflow Havoc. How to Avoid.

It’s difficult to handle the current economic environment unless you know what you’re dealing with. The truth is that no one knows the depth, breadth or length of the current economic slump due to COVID-19. It’s been like a one, two punch. The default rates is out of control which, in turn, has caused banks to pull in there horns in lending.

GPA Capital, through its years of experience (this is not our first recession) is ready to help. Cash flow lending is challenging, particularly since one cannot produce stabilized revenue. However, we can look at our opportunistic fund for one. We can also look at changing asset class for collateral, which utilizes your self-liquidating assets such as Accounts Receivable, MVA’s, O&G Reserves or Other Pre-Sales and Invoice Financing. Projections are fine if supported appropriately.

Let’s talk further! Apply here to get started: https://gp-assoc.com/#/

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

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.