Rent loans are some of the most common ways to finance U.S.-based commercial real estate projects. The loans are widely available for nearly all types of commercial properties, and they have some notable advantages over other kinds of commercial property loans.
Rent loans are also referred to as "conduit loans" because of how they're resold as securities. The loans are frequently packaged together and resold to investors as fixed-income investments. Thus, the loans are essentially resold as bonds and provide commercial property owners with indirect access to bond investors' capital.
Rent Loan Highlights
Eligible Properties: Multifamily, Office, Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage
Loan amount range: Minimum $2,000,000
Interest Rate: Fixed rate throughout term and priced over corresponding swap rate.
Loan Term: 5, 7, and 10-year fixed
Amortization: 25-30 year amortization with up to 10 years of interest-only available in select instances.
Maximum LTV: 75%
Minimum DSCR: 1.20-1.25x
Minimum Debt Yield: 7-8%
Recourse: Non-recourse except industry-standard "bad boy act" carve-outs.
Prepayment: Typical 2 to 3 year lockout, defeasance or yield maintenance thereafter.
Reserves: Taxes, Insurance, Replacement Reserves, Tenant Improvements and Leasing Commissions typically required.
Advantages of Rent Loans
Rent loans' features offer several advantages that make them an attractive financing option in many situations:
- Conduit loans usually come with fixed interest rates, and the rates are commonly lower than what's available through conventional mortgages. Interest rates are typically based on the current U.S. Treasury rate with a margin added on.
- Conduit loans are both non-recourse and assumable. The former feature helps protect individuals, while the latter makes it possible to sell a commercial property without refining the loan terms.
- Conduit loans are available in a wide range of amounts, and they aren't restricted to the terms that commercial mortgages which are offered through major agencies must meet.
Disadvantages of Rent Loans
The advantages that Rent loans offer make them well-suited to many properties and projects, but property owners should be aware of two disadvantages:
- Although conduit loans aren't limited to the restrictions of major agencies, they still must comply with tax laws that allow the loans to be resold as securities. This restricts what variables borrowers can negotiate in the loan terms.
- Conduit loans' prepayment penalties can carry more risk than the prepayment penalties of conventional mortgages. Whereas a conventional mortgage's prepayment penalty is normally calculated as a percentage of the lost interest, a conduit's loan is often tied to the Treasury yield. If Treasury bonds go down substantially, this can result in substantial additional prepayment costs.
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