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New commercial equity line creates liquidity

New Commercial Equity Line Creates Liquidity

Commercial building owners have struggled for decades on how to effectively and economically tap their commercial property’s equity. This lack of liquidity seems to be one of the biggest complaints in commercial real estate ownership.

There are a few new options however for commercial property owners (both investors and users) that are turning heads – a Commercial Equity Line of Credit.

Historically, accessibility to commercial equity via loan products has been very limited, and for good reason. Loans that sit in second lien position are one of the riskiest positions for a lender to be in.

However, banks have been known to take on these types of loans assuming that the borrower was strong and had good fundamentals. For example, combined loan to value and debt coverage ratios were strong – typically less than 60% LTV and over 1.4 on a DCR. Banks wrote these lines almost like a business loan that happen to be secured by the commercial building. The banks also, wanted a depository “relationship,” as bankers always say, with the borrower.

Developers of large sophisticated projects also have had second lien position loan options, called mezzanine loans. But these types of loans are normally only available to highly experienced and successful developers working on projects over $5,000,000.

Interestingly, a few lenders have recently stepped up and created commercial equity lines aka commercial lines of credit. The result is liquidity never before known for small building owners. Highlights include no upfront fees to close loan (no appraisal, no title, and no environmental fees), combined loan to values up to 75% and relatively low interest rates at Prime plus .5% – 2.5%.

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