Understand lending requirements for special-use properties when taking on these loan requests
Nathan LaBudde and Fred Hollister, loan officers, Imperial Capital Bank
As published in Scotsman Guide's Commercial Edition, August 2007.
Any analysis of special-purpose commercial real estate invites the question, "What makes a property 'special?'" A narrow, lender-driven perspective would be that these properties are special because they require specialized and less-frequently available financing.
In our experience, lenders generally define a property as special-use and determine their willingness to fund the property by analyzing one or more of the following three components:
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The property's physical attributes;
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The ownership structure; and
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Environmental issues or concerns.
Ultimately, when it comes to financing a special-use property, you shouldn't worry about whether there is a loan for it out there. The saying, "For every loan, there's a lender," still applies. Instead, ask yourself where you can find that particular lender and what you can do to facilitate the transaction.
Property attributes
Specialized properties are typically restricted by specific physical attributes. For example, restaurants often include specialty fixtures, distinct décor and specific interior configurations that conform to a big front room, multiple bathrooms and a large industrial kitchen.
Lenders want to know what kind of new tenant can occupy the space if the current tenant's business fails and the property goes dark. A vacant restaurant, bowling alley, dairy farm or movie theater each requires a special-use tenant. And the property-owner may have to wait 12 to 18 months for that particular tenant to move in and begin paying rent.
A day-care or preschool facility may require a special-use tenant, but it will not necessarily be housed in a special-purpose property. For example, some day-care centers occupy properties that could be converted into office buildings relatively quickly and at a low cost. Other facilities, of course, operate in specialized properties that would be expensive to convert to another use.
Traditional lenders look closely at the collateral's value. This gets tricky in the case of properties like recreational-vehicle parks. There, collateral primarily consists of asphalt pads with some utility wiring and perhaps some basic plumbing -- basically, raw land. The income-generating component can be rolled away in the light of day or dead of night. Therefore, special-use designation is usually warranted.
Collateral liquidity is also important to lenders. Should the lender be forced to sell the property collateral, how long will that process take?
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