263 – Jake Clopton – How To Get A Bridge Commercial Loan

Synopsis

Clopton Capital’s President, Jay Clopton, founded the company 14 years ago. Clopton Capital is a nationwide finance broker that connects borrowers with competitive capital sources and organizes joint venture equity for all sorts of commercial real estate assets.

In this episode, Jake will discuss how their company handles various types of loans and the requirements and processes we must follow if we want to get one.

Key points

Loan Products

Jay’s company usually deals with people with one to ten units who are geared towards achieving twenty- to forty-unit apartment buildings. A lot of the deals they end up closing are straightforward commercial mortgages, but they do accept short-term products like value-add scenarios, bridge lending, and construction.

Bridge lending is beneficial if you are renovating and want to avoid longer-term fixed rates and prepayment penalties. They also deal with a considerable amount of non-recourse, which is probably not common in the residential space. For non-recourse, there are no personal guarantees that are typically attached alone, although there are “carve-outs” that general partners still must sign on to take on partial or full recourse liability for the loan.

Loan Terms

Bridge lending often yields better capital returns. Since there are additional expenses in a bridged loan, such as closing fees, bridge owners want to recycle their capital as soon as possible. If the customer is refurbishing an apartment building, the term will most likely be 24 months, with possible extensions. Bridge loans, in his experience, often range from 12 to 36 months.

Loan Pricing

Commercial bridge loans would have interest rates ranging from LIBOR plus 250, all the way up to 11 to 12%. Every lender in this business is unique, and a large portion of them is determined by how they raise and leverage their resources. Some lenders, for example, don’t utilize leverage at all on their balance sheet since all they do is lend out their own money; such are often higher yielding. So, if you think of it as their equity that they’re trying to achieve a specific return on, they could want to return anything between 9 and 12% of their fund, and they’ll have to pass all of that cost right on to the borrower.

Loan-to-Value Ratio (LTV)

The type of property determines the loan-to-value ratio. Among the various properties available, multifamily is most likely the most valuable. Bridge loans can reach up to 85%, straightforward commercial mortgages can reach 80%, and conventional LTVs, such as an industrial building, may be about 75%. As you go into riskier asset types like retail and hotels, the LTVs start to fall from 75% to 65%.

Jake said that they do not require a primary market in terms of location. A lot of what they’re dealing with is in secondary and tertiary markets.

In terms of like requirements, there are different types of conditions for every deal. There’s an LTV of 75% or less in a straightforward commercial mortgage and a one and a quarter debt service. In terms of sponsor requirements, you must have a net worth that is relatively similar to the loan amount and about 10% liquidity outside the deal you’re doing.

Recourse Loans vs. Non-recourse Loans

In terms of price, there are competitive recourse lenders and highly competitive non-recourse lenders; therefore, the difference is mainly determined by the structure of the actual financing. For example, suppose a property falls into foreclosure or bankruptcy. In that case, non-recourse loans will be organized in a special purpose entity, which implies that the property will be retained in an LLC. Then there will be other things that come along with the non-recourse, such as carve-outs, so even if it’s non-recourse, there still has to be a guarantor who identifies a property against fraud, misrepresentation, etc.

Let’s say, on the other hand, you declare bankruptcy to prevent the lender from repossessing the property. In this scenario, you just made the loan fully recourse to yourself. The idea is that if you don’t play ball with the way the loan agreements are written, it will spring recourse on you, but if you follow the loan terms, you’re good to go.

Refinancing

To refinance a multifamily, they can underwrite a three-month trailing period. They will want you to have about 90% occupancy with business tenants attached to it. Hotels, for example, underwrite to a minimum of a 12-month trailing period.

Rent Rolls or Operating Statements

Every property is unique. Companies like Jake’s are underwriting to a typical expense, so they will surely pay attention to the operating statements if they see any unusual expenses. As for current rent rolls, companies would want to know where the place currently rents at, among other things. Checking these details would give them a solid idea of how much margin they’re raising in the deal to add value.

Limitations

The first step in dealing with a commercial space, according to Jake, is to develop your operational team. You should work with a reputable property management company and know some local contractors. The next stage is to find a property and then bring in a qualified financer to begin sizing up the deal and arrange finances.

References

More from our guest

• For more information on Jake Clopton, see his LinkedIn profile, Jake Clopton.
• You may also learn more about commercial lending by visiting their website at www.cloptoncapital.com.