Tips to funding niche commercial properties
Matching lenders and markets
- Lenders seek mortgage business from companies in unconventional fields
- Know what ventures individual mortgage-lenders fund and what they shun
- Prepare your paperwork — there are often specialized requirements for specialized businesses
- Shop around, but be prepared for relatively expensive and restrictive loans
Landing a commercial mortgage for a conventional investment, like an apartment building or an office complex, is a pretty straightforward process. Lenders usually understand the business, know what the property is worth, and can quickly estimate its cash flow and credit potential.
But it’s different if you’re trying to fund something a little more unusual — a muffler repair shop, for instance, or maybe a marina, or a funeral home. For those niche businesses, and dozens of others like them, it can be difficult to find lenders that even understand your operation, let alone are willing to give you a mortgage to support it.
There are plenty of lenders, however, that serve niche borrowers. Even banking giants such as Wells Fargo have acquired specialty lenders, and smaller banks have created niches of their own. American Banker has documented an Illinois lender specializing in motorcycle dealerships, a Rhode Island institution catering to septic-system cleanup companies, and a Pennsylvania bank created in 2013 to serve Amish and Mennonite farmers.
So, there’s mortgage money to be had by those taking the less conventional paths, although it might cost a little more in terms of effort and money to find it. Here are some tips for getting there.
Know your lender
Find out the specialties of lending institutions, especially the nonbank lenders that have become much more significant players in the commercial mortgage field since the recession — when banks became skittish about commercial loans. An online search for lenders can guide you to a list of specialized lenders in your niche. Remember, just as they solicit business from certain markets, lenders might shun deals in other categories. Some, for example, will not fund gas stations or car washes, or require minimum loan amounts. A visit to lenders' websites can inform you about any restrictions and save you the time of attempting to set up a fruitless meeting.
At the very beginning of the process, you'll need to provide up-to-date business and personal tax returns, and personal financial records — the records that are required for any commercial mortgage loan. In addition, a specialized mortgage loan may require a specialized business plan and evidence that you know something about running the business, or have hired somebody who does. You’ll need industry-specific documents and inspection records. If you’re seeking funding for a golf-course, for instance, the lender will want to see an irrigation report, environmental survey and proof that you can safely store fuel and chemicals. Find out the records you need and begin gathering them, or at least start gathering, before you meet with the loan officer. You’ll waste time and delay the closing of the loan otherwise.
If you're buying an apartment building, you might be eligible for a Fannie Mae- or Freddie Mac-insured loan, or other nonrecourse loans — there are loans secured by the building itself, rather than your own personal collateral. That’s less likely when the loan is for a niche business in need of a commercial mortgage. In that case, there's a good chance the lender will want a personal signature on the loan pledging your assets as collateral — and maybe a co-signature from a spouse guaranteeing the safety of the lenders’ investment in the event of a divorce.
Come with cash
Lenders often require higher loan-to-value (LTV) ratios for niche mortgages than for apartment or office loans. That means, to secure the loan, you’ll be required to come up with a larger down payment. You may get a good loan-to-value deal, but you may also pay a higher interest rate for the opportunity. As with any loan, when you’re seeking a commercial mortgage for a niche business, shop lenders’ advertisements and websites. You'll find those that offer low down payments, nonrecourse loans and minimal documentation for the most specialized mortgages. Your professional and credit background, and the lender's level of risk will have a lot to do with the terms of your loan package, but a little investigation can result in a significant payoff.