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There are many commercial real estate property types that Small Balance Commercial Lenders will use to secure a first lien mortgage or deed of trust.
Below is an overview of the types of commercial property we typically see in Small Balance Commercial Lending:
A residential rental property containing 5 individual units or more. The units typically are in one building, but can be physically separate and located on one or more parcels of land (if located on more than one parcel, the parcels must abut each other). Units must contain at least a kitchen, bathroom and living area and be in compliance with local zoning laws.
This property type is a mix of residential units and commercial units (typically retail). Mixed-Use properties can be classified as either Mixed-Use Residential, wherein the income from the residential units is greater than 50% of the income generated by the property, or Mixed-Use Commercial wherein the income from the commercial units is greater than 50% of the income generated from the property. Side Note - Some Lenders will include Mixed-Use Residential in the same loan program as Multifamily, thus resulting in possibly better pricing.
A rental building that is occupied by retail establishments (i.e. clothing store) or service-based operations (i.e. insurance office).
Tenants may also include restaurants, although many Lenders will have restrictions as to the size of the restaurant bay in comparison to the overall square footage of the property. Restaurant space may be harder to lease depending on the style and extent of the tenant improvements, so Lenders may be hesitant to fund a loan on a property with a large restaurant space.
One or more units in a building with tenants operating a commercial business (call center, insurance brokerage, etc.), professional office or governmental office.
Many Lenders will exclude medical office from their portfolio due to the specialization of the space, which may include additional plumbing, enhanced electrical systems, filtration systems or reinforced flooring for medical equipment (i.e. to support the weight of MRI equipment). Lenders tend to shy away from special purpose properties, as they tend to be harder to tenant and/or convert for rental for other types of users.
A building that contains one or more bays, typically for the storage of equipment for security reasons, think construction equipment or lawn care equipment, or for the storage of goods for distribution.
Larger tenants will require dock height bays for the easy loading and unloading of tractor trailers. Proper dock height access is important and can add increased desirability with tenants which brings a rent premium compared to ground level buildings in the same market.
Lenders need to be aware of the type of tenants within the property and the way the units are being used. Warehouse buildings can be a big concern for violations of environmental laws, usually from the storage of hazardous materials.
A special building designed with small bays that are leased for the storage of personal items. These type buildings typically have security features in addition to the locks on the units themselves. The rents in a Self-Storage property are typically month to month.
These buildings are similar in construction to warehouse, but within the unit there is light manufacturing and/or assembly space. These buildings do not require extensive physical plant buildout, think airplane assembly line, and can be easily convertible to other uses, such as warehouse.
Much like Mixed-Use properties, which combines two types of property, Flex Space is typically a combination of office and warehouse. Popular configurations are for small businesses that need retail/office space along with storage for their inventory, such as tile store, or service- based businesses that need an office for management of the business and storage of tools and equipment, such as a contractor.
Every Small Balance Commercial Lender is different, so review their loan programs in order to find out what property types they are willing to lend on. Remember there is a lender out there for almost every property type. I have seen lenders with church loan programs, gas station programs, medical office programs and host of other specialty types. Having said that, most Small Balance Commercial Lenders will originate loans based on the property types described above.
Check in regularly to read more about SBC lending, and check out the "Small Balance Commercial" section of our blog.
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