Office property purchase loans are available, but not easy to get

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Ask a Lender
September 21, 2017


Key Points

The basics of office loans

  • Office property purchase loans are widely available.  
  • Office properties are classified by type and the market.
  • Regardless of the building’s size or classification, the debt-service coverage ratio is considered closely.
  • Borrowers typically have to show two years of personal- and business-income statements.

Office properties are a mainstream commercial real estate type, and many lenders do offer loans for purchasing office buildings. As with other commercial property types, however, lenders typically want a lot of information about the building, the current tenant mix and the borrower.

Office properties are strictly categorized by class.

Office types

Class A properties are the marquee investment-grade properties that command the highest rents and include ample amenities. These include the towering steel-framed skyscrapers that form the skylines of major cities and serve as the headquarters for large law firms, banks and Fortune 500 companies.

Down the pecking order are Class B properties, which are often located in the suburbs. Class B buildings may be newer wood-framed buildings but lack the amenities of Class A space and can be less than three stories tall. Still farther down the quality and amenity scale are the Class C facilities, which are usually older buildings, but often with solid occupancy records. Class C offices also can be walk-ups located above retail storefronts, or ground-level facilities designed for service businesses.

A wide range of investors, including commercial banks, conduit lenders, life insurance companies and Real Estate Investment Trusts, lend for office properties. Most loans can be taken out at fixed rates for up to 10 years, at which time they mature and can be refinanced without penalty. Office-property purchase loans typically are structured to amortize, or payoff, at a pace of 15 years to 30 years.

As credit conditions have loosened, some banks and other lenders are offering purchase financing of up to an 80 percent loan-to-value ratio on office properties.

Underwriting standards

Underwriters of office-property loans typical require a healthy building tenant mix and prefer staggered lease-expiration terms. The rents usually have to be supported by historical data. Lenders ideally want to see at least three years of information on each tenant.

The debt-service coverage ratio — or the projected property income above the amount needed to service the loan payments — is examined closely. Regardless of the building’s size or classification, a debt-service coverage ratio of 1.25 is close to the industry standard.

A number of factors can influence the debt-service coverage ratio, such as the age and condition of the office property, the specific lease agreements and market conditions. The market’s overall vacancy rate and nearby competing office space, for example, can affect the property’s projected revenue and thus the debt-service coverage ratio.

In many cases, lenders also require the borrower to hold reserves at the time of the closing to ensure that property maintenance and repairs can be covered.

Lenders also will closely evaluate the borrower’s track record and typically require two or more years of personal- and business-income statements.

The bottom line is that many lenders are doing office-property purchase loans and sometimes provide a variety of loan products as options. Borrowers, however, need to come to the lender prepared, with a detailed portfolio that tells the story of the building and their own history.

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