Special-use properties like restaurants, hotels, and car washes are difficult to finance due to their specialized nature. They are often harder to convert to other uses than traditional commercial properties. Lenders are cautious approving loans for special-use properties, typically requiring 20% equity and only financing 80% of the property value. Additionally, the equipment involved in special-use businesses requires shorter loan terms that are challenging for borrowers. Considering the total project costs rather than just property value helps make special-use projects more feasible to finance.

1. REDEFINING
‘DOABLE’
By Christopher Hurn, president, Mercantile Commercial Capital
Illustration: Keith Negley
S
     -          often cannot acquire and use as-is for another properties than they do with straight-forward
designed and constructed with a particular purpose. Restaurant properties, for example, acquisitions.
purpose in mind. can make great office buildings because they One issue is potential vacancy. An office
For example, a building with a large open kitchen usually are well-located, though some remodel- building, for example, is said to have multiple
area with extra plumbing often is best-suited for ing might be needed. The same can’t be said for uses for multiple users or types of tenants. In
a restaurant — and not much else. a carwash. other words, if an architectural firm moves out,
When you’re faced with securing financing Because of the specialization of these proper- another professional firm can usually take over
for restaurants, hotels, motels, day cares, car- ties, along with the equipment usually involved the vacant space with little trouble.
washes, gas stations or assisted-living facilities, in their operations, commercial lenders generally Specialized deals, however, are becoming
to name a few, it’s best to be prepared for what proceed with great caution when presented with increasingly harder to do, especially when they
you’ll encounter in the commercial lending special-use and single-use deals. are constructed from the ground up. With tra-
marketplace. These are often the most-difficult commer- ditional commercial lenders, your clients often
Special-use properties are often lumped cial properties for which to secure financing. can expect no better than 80-percent loan to
together with single-use facilities, but that But they’re not impossible for brokers who know value (LTV).
might be too much of a generalization. The what lenders seek. While 20-percent equity may not seem too
difference between the two comes in the ease terrible for a borrower at first glance, remember
of conversion. What to expect that special-use properties tend to involve quite
Special-use facilities often are easier to con- Even in an ideal economic environment, bank- a bit of specialized equipment. This equipment
vert than single-use facilities, which businesses ers have a more difficult time with special-use Continued …
R F S G C E  ., J 
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2. Redefining ‘Doable’ you try to place the loan. financed as part of the loan. Many commercial
Again, greater equity injections are often lenders do not offer this, though.
… Continued
required of borrowers with special-use proper- Most commercial lenders that offer LTC com-
often is financed over much-shorter terms, often ties. Putting less money down and easing initial mercial loans finance 85 percent to 90 percent
with three-, five- or seven-year amortizations. cash-flow concerns with longer amortizations of a project’s total cost. When 90-percent-LTC
Thus, it can be difficult for these clients to inject can help your clients better afford their project financing is applied to special-use construction
that much equity into a deal without affecting in the long run. projects, for example, it’s often equivalent to
their cash flow. And in softer economic times, nearly 95-percent LTV after including all soft
capital and cash flow are critical. How to look at costs costs and other construction-related costs, such
When you remember this for your com- as contingency and interest reserve.
While most traditional commercial real estate
Thus, for borrowers with special-use prop-
mercial borrowers, you’ll likely be busy in good financing focuses on LTVs, it often is better for
erties, LTC financing often can paint them a
times and in bad. special-use borrowers to secure financing based
clearer financial picture.
on the loan-to-cost (LTC) amount. This takes
New DSCR realities your clients’ total project cost into account, not
In special-use deals, your debt-service-coverage just the lesser of the appraised value or purchase
The next time you work on a special-use proj-
ratios (DSCRs) are key. You should see if the price of their property.
ect, think about getting financing that will suit
your clients’ needs and put them in a better po-
“SPECIALIZED DEALS ARE
sition to grow. Despite the economic turns, this
is a great time for owners of small and midsized
BECOMING INCREASINGLY
businesses to invest in their commercial proper-
ties — if they do it right.
HARDER TO DO,
Help your clients make the right decisions, and
you might reap the rewards yourself, as well.
ESPECIALLY WHEN THEY
ARE CONSTRUCTED
FROM THE GROUND UP.” Christopher Hurn is presi-
dent of Mercantile Commercial
Capital, the nation’s leading
90-percent loan-to-cost com-
deal’s cash flows — in other words, if the bor- Special-use-project costs can differ from
mercial loan provider. He is one
rower can repay the debt on the loan. those of conventional projects. They include: of Coleman Publishing’s “Top
Normally, an acceptable DSCR is 1 to 1.2. 12 Most Influential SBA Lend-
The property’s purchase price;
This means the special-use-business owner ers” for 2008 and has received awards from the
has enough cash to cover the total debt — the Construction and renovations;
National Association of Development Companies
proposed loan and any other long-term liabili- Soft costs, such as fees for the architect, engi- and the Small Business Administration. MCC also
ties — and then some. neer, permits or impact; ranked on the 2007 Inc. 500 list of the fastest-grow-
With special-use projects in today’s economy, ing private U.S. companies. Visit www.504Experts.
Closing costs; and com or call (866) 622-4504. Hurn is expanding
however, lenders often seek a DSCR of 1.2 to 1.4.
The stronger the borrower’s cash-flow-coverage Furniture, fixtures and equipment, which MCC nationwide; visit www.ACE-Report.com.
ability, the better off you’ll be as a broker when could help the cash flow of a business when
SBA: A PRIMER
For a number of special-use loans, U.S. Small Busi- less money down for their commercial properties
ness Administration (SBA) financing could be an and because of the ability to get the least-expen-
option. sive capital available on nearly half their loans.
Bankable borrowers have chosen the SBA’s 504 For a primer on the SBA’s 504 program and its
program over conventional financing because of other options for small businesses, visit www.sba.
the high cash-on-cash return they get by putting gov/services/financialassistance.
R F S G C E  ., J 
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