How to finance a large-scale, mixed-use property
The market and loan programs for mixed-use facilities of five or more units
- Demand for these properties have increased, partially due to relaxed zoning codes.
- Although they usually have residential units, they are typically funded with commercial loans.
- Borrowers should look closely at owner-occupancy requirements when comparing lenders.
- Loans are available from traditional and alternative sources, as well as government programs.
Mixed-use developments have been on the rise throughout the U.S. in recent years as zoning laws have become less restrictive in many states and cities.
Although they typically have residential components, such as apartments or condominiums, mixed-use properties with five or more housing units are considered multifamily properties. Therefore, commercial loans are most often used when purchasing, renovating or constructing one of these developments.
If you’re thinking of purchasing a larger mixed-use property with at least five units, or investing in the construction of a new one, here are some basics you should know about market trends and the types of commercial mortgages that can help deliver the required funds.
Most cities have historically separated residential areas from other types of zones, such as commercial or industrial properties. Local governments have relaxed zoning regulations in recent years, however, as residents have become more interested in the concept of walkable communities, where they can easily access goods and services each day.
Mixed-use facilities are also in high demand among business owners because these spaces put them closer to their customers. For example, the recent trend of new stadiums and arenas being built in the downtown areas of larger cities means thousands of people are looking for food and entertainment options before and after a sporting event. Additionally, investors benefit because mixed-use properties can mitigate their risks of loan default. If demand shrinks among commercial tenants, high demand for housing can stabilize the property, or vice versa.
Mixed-use developments are not only sprouting up in urban centers, but in suburban areas and small towns. They may be vertical or horizontal in nature, meaning apartments may be stacked on top of retail space in a multistory building, or condos may be built adjacent to small workshops and manufacturers.
When lenders consider mixed-use financing, they may base their decision on the property’s income structure. Some properties may be “full income” with all spaces generating revenue through tenant leases. Other properties may be “partial income” that include some owner-occupied commercial or residential space. And properties may be categorized as “non-income” if they’re entirely owner occupied.
There are many national, regional and local lenders that offer commercial mortgage loans for mixed-use properties. Some of these loans have short terms, while others are similar to traditional home mortgages, with terms of 15 to 30 years.
Loan amounts vary widely, with some lenders committing to small balances of $5 million or less, and others going up to $100 million or more. Loan-to-value (LTV) ratios are typically between 65 percent and 75 percent, meaning borrowers will have to provide a significant down payment. Some lenders will only accept a first-lien position, also known as senior debt, but others will take subordinate positions in exchange for higher interest rates.
There are three common funding paths for mixed-use properties.
These loans are often available through traditional banks, credit unions and online lenders for amounts up $20 million, terms of 15 to 30 years, and interest rates starting at 4 percent. There may not be an owner-occupancy requirement, but renovation projects may be ineligible, so newer buildings in good condition are prime purchase options.
Commercial lenders may charge origination fees of 1 percent to 3 percent of the loan amount, closing costs of 2 percent to 5 percent and prepayment penalties of up to 1 percent.
These usually come from alternative sources known as bridge lenders, hard money lenders or private lenders. Terms are almost always six years or less. An investor or business owner might turn to a short-term loan to compete with an all-cash buyer, to season funds prior to refinancing into a permanent loan, or to renovate a building.
Short-term loans usually have similar fees and prepayment penalties as permanent loans, but interest rates often soar into double digits. Lenders may require prior experience with renovations or multifamily projects, and may expect a senior-debt position. But they may be less concerned with credit, as FICO scores as low as 550 may qualify.
The U.S. Small Business Administration (SBA) and U.S. Department of Agriculture (USDA) back mixed-use loans through approved lenders. The SBA’s 7(a) loan program is for purchasing or refinancing an existing property, while its 504 program permits construction or renovation. The USDA lends in rural areas and requires the owner to occupy at least 51 percent of the property. Government-backed loans are for smaller projects of up to $5 million, with terms of 10 to 30 years and interest rates starting at 3.75 percent.
Business owners should be operational for one to three years. Minimum credit scores range from 620 to 680. And although the interest rates are more favorable than short-term loans, the origination fees may be higher. SBA loans may include appraisal and environmental-study fees of several hundred dollars, while USDA loans may include an annual renewal fee of 0.5 percent of the loan amount.