Retail property refinances are one of the preferred building/loan types by capital sources. This is a very broad category, that is divided between single tenant owner occupant or investment facilities, corporate credit tenants, neighborhood retail, big box retail, etc. Financing structures as well, depending on the building type as well as many other factors are equally as broad. Loan programs can range from traditional 5 year fixed, 20 year amortization to stated income loans to 30 year fixed to credit tenant based financing.
The underwriting discussion below is based on owner occupant and 'neighborhood investment retail' with loan amounts under $3,000,000, since that is where our expertise is.
Debt Service Coverage Ratio restrictions are typically set at a 1:1.2 for this building type. Meaning that for every $1.20 of net income (income after taxes, insurance, repairs etc) the property produces, the mortgage payment will not exceed $1.00. Said in another way, after all expenses and the mortgage have been paid, the owner will need to net $.20 to qualify for the best loan programs.
Broad exception can be made on this rule on retail mortgage refinances. For example, stated income loans can be an outstanding option for owners that have low debt coverage ratios due to either overstated expenses, current high levels of vacancy, or understated income, etc. Another example would be an investment property with a AAA corporate guaranteed leases, which can see DSCR's as low as 1.03.
Tenant evaluation is important within the retail property category. Lenders scrutinize the time left on the current leases and other relevant information. Often, lenders will not want to have the fixed period of the loan to exceed the time left on the current lease. On single tenant retail properties traditional banks will often not want the amortization period of the loan to exceed the time left on the lease, which can create problem with cash flow among other issues.
Market value and market rent is important and will be evaluated and compared to the subject property. Age, appearance, location, accessibility, and local market conditions, as well as other factors are considered.
Loan to value restrictions on retail property refinances are normally capped at 80% on a rate and term refinance and 75% loan to value on cash out refinances. Higher LTV's are available on a limited basis, and depend largely on strong DSCR. Borrower should expect increased rates and fees for higher LTV's.
The personal credit worthiness of the borrower will be examined. 680 credit score is normally the minimum for the best finance options. Exceptions can be made on this as some conventional lenders will consider scores as low as 600. The overall strength of the property, tenants, net worth, DSCR, and LTV can offset concerns of low credit scores. The borrowers net worth can be a huge mitigating factor with portfolio lender coupled with a personal guarantee on difficult retail property refinances.
