Scotsman Guide > Commercial > May 2009 > Article

 Enter your e-mail address and password below.


Forgot your password? New User? Register Now.
   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2009

What's So Special About Special-Use?

Understand these properties' quirks and what lenders look for to close more deals

Unlike conventional commercial real estate, such as office buildings, apartment complexes or mixed-use developments, special-use properties often present circumstances that can make it difficult for mortgage brokers to close deals. Regardless of the business, most special-use properties have characteristics that also may make many banks and lenders nervous.

For example, although family-owned restaurants often can be successful, many aren't well-managed and tend to have higher turnover rates compared to franchised fast-food restaurants. Further, although convenience stores sell needed commodities such as gasoline and food, many lenders consider them environmentally challenged if they store gasoline underground. When it comes to assisted-living facilities, lenders often are uncomfortable because of these businesses' requirements for having a certified manager, adequate staffing, and training in first aid, emergency procedures and resident rights. And properties such as carwashes usually have limited use capabilities and conversion costs that often are greater than the value of the current use.

Brokers who understand these properties' issues -- and who know where to turn to value and to fund their clients' special-use deals -- can help to nip any issues in the bud before they arise.

Determining value

Because of their individuality, special-use properties can present various valuation challenges. They usually require specialized appraisers to determine an accurate opinion of value.

For example, golf courses can come with many appraisal problems, in part because they vary by type. Some are parts of country clubs, while some are municipal, privately owned or leased. They can be freestanding or combined with resort-hotels, condominiums or retirement communities.

Golf courses can also have additional profit centers, such as bars, restaurants, pro shops, driving ranges, swimming pools, in-house catered events or meeting rooms. These variations can make it difficult to find an accurate property appraisal.

On the other hand, a seemingly simple business such as a bed-and-breakfast inn also can be difficult to appraise. This kind of a property often is located in a remote area where relevant comparable sales may be rare or nonexistent.

As such, finding a specialized appraiser who works with the particular property type for which your client needs funding likely will be your best bet.

Finding financing

Special-use properties also have financing challenges. Again, this often is because conventional lenders might be uncomfortable with these properties' different quirks.

For example, the pool of lenders for gas stations and convenience stores is usually limited because of the properties' single-use facilities, environmental concerns, and lack of income and cash-flow documentation. And conventional banks often shy away from bed-and-breakfast inns because of their location, small loan amounts, and the fact that most first-time buyers lack the experience to manage and operate the business.

As a result, these and other special-use properties require financing from specialty lenders.

There are different types of special-use lenders. Some offer both U.S. Small Business Administration (SBA) and conventional loans. These are typically recourse loans with debt-service-coverage ratios of 1.25 and 20- to 25-year amortizations, and they often require personal guarantors and full documentation. Loan amounts and maximum loan-to-value ratios (LTVs) will vary by type of transaction. Some commercial banks will consider credit scores as low as 640. Ownership experience often is required, and market and management viability receive extra attention.

Some hard-money lenders also provide special-use financing, often through private mortgages and trust-deed investing. Conditions and terms typically are more flexible than a traditional bank, but hard money also is more expensive, often requires cross-collateralization, and usually is restricted to specific property types, geographical regions or both.

Finance options can also vary by type of business and lender. For example, conventional gas-station loans might have a maximum 60-percent LTV with a five-year fixed rate and 20-year amortization. The SBA, however, might allow 80-percent to 85-percent LTVs and accept projections for gas stations. Portfolio lenders often will allow as much as an 80-percent LTV with land, fixed rates and 20-year amortization. And specialized lenders might offer a 75-percent LTV and five- to 10-year fixed rates with 25-year amortization.

Improving the odds

Lenders typically scrutinize special-use properties more than they do conventional properties. In addition to normal underwriting standards for LTVs, financials, tenant evaluation, environmental status and creditworthiness, lenders will usually have tougher eligibility requirements for factors that affect a business's performance, such as the building's age, appearance, accessibility, local-market conditions and competition.

Generally, the more "special" a special-use property is, the tougher the underwriting and the more expensive the financing will be. As a result, sellers, buyers and mortgage brokers should consider taking extra measures to improve the odds of obtaining financing and closing deals.

To start, in addition to having documents in order, sellers can improve their odds by realizing that an underperforming business is worth less than a profitable one and by pricing their property accordingly.

They also can improve the likelihood of the buyer's ability to get financing if they are willing to carry back a second mortgage. With a seller-financed second mortgage, qualified buyers can often get in for as little as 10-percent down.

Buyers also can improve their situation by having more than the minimum downpayment, seeking financing that is within their means and having relevant management experience with a history of success.

And finally, brokers can help the chances of finding funding for a special-use-property deal by making their clients look as good as possible on paper. This means having full documentation, preparing a professional sales brochure or portfolio, and realizing that special-use lenders primarily look at business cash flow to service debt, not just market rents.

By keeping all these factors in mind when seeking a loan for a special-use property, brokers can help their clients achieve the financing they seek.


Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Scotsman Guide Digital Magazine

Related Articles



© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy