Office buildings are distinguished into the following classes. While definitions vary, class category typically relates to age and size.
If the building is less than five years old, it generally qualifies as Class A. A minimum of 30,000 sq.ft. is a base to consider. Location in a relatively new office park is also a factor.
Class A buildings usually attract credit tenants and tenants of a 10,000 sq.ft. minimum, and loan cost is often lower for those with a larger number of tenants. The bigger the building, the lower the risk if occupancy is stable.
Loans for this type of building are usually in excess of $2 million. The least expensive loan for a Class A building is usually a conduit loan. It is priced at par (no lender fees) and is non-recourse. However, underwriting is conservative so the loan-to-purchase price or value is often lower than with other sources. It is a trade off between loan amount and price. As the difference is often slight, many entrepreneurs gravitate to the larger loan because the cost of debt capital is significantly cheaper than any other form.
There are a number of major firms competing for this business because of the size of the loans. Some primary lenders also offer Mezzanine financing, a form of equity investment that adds to the total debt obtainable for the project. Mezzanine financing is more competitive over $2 million, so the project must be substantial to attract this extra leverage. Mezzanine financing is substantially more expensive than primary debt financing, but less expensive that equity capital.
Because the loan is written on the income value of the building, the underwriter primarily looks to the tenants for the repayment of the loan. The loans are usually non-recourse to the principals of the borrower. It is rare that any loan for this type of property would be made to an individual. The required ownership is a single-asset ownership entity.
The majority of these buildings used to be Class A, but time marches on. New developments and parks open up, and the old buildings command less rent and more marginal tenants.
This type of facility is usually in good repair, has multiple tenants and can demonstrate a strong track record. It is a victim, however, of location and aging systems. Class B structures can remain so for a long time with repair and renovation.
Usually these structures seek loans of $1-3 million. However, since there is no limit on size, a Class B structure could be worth substantially more than that. Financing for Class B is underwritten based on income from multiple tenants. The length of lease and longevity of leasing is as big a factor as the expense of renovation. Most loans are non-recourse.
Mezzanine financing is also available, as well as inexpensive conduit financing if the building is in good shape and demonstrates a strong rental history. Many life companies are interested in this type of investment because they can earn a little more and compete a little less against conduit products.
Financing for this type of facility is often recourse as the tenant mix is usually weak or concentrated in a few tenants. Many of these facilities need major restoration and, if properly located and restored, can rise to a Class B once again. Acquisition/construction and mini-perm financing are available to these classes on a case-by-case basis.
Lenders are very selective about these properties as the risk is much greater, thus loan rates are much higher.
|
HOW EQUINET WORKS
