Figuring out how to finance a commercial real estate deal can be like weaving through Charlotte’s Web. There are so many pathways with so many intricacies to consider. Ultimately, the loan products available to you will depend on the property type. In this article, we take a deep dive into industrial real estate lending. We look at the various forms of industrial property financing, ranging from traditional bank loans to private loans, short-term bridge loans and more.
What is industrial real estate?
Industrial real estate includes manufacturing facilities, warehouses, distribution centers, and self-storage facilities. The key characteristics of industrial property are buildings that have open floor plates, flat floors, high ceilings and multiple loading docks. These buildings are generally used by tenants who need to manufacture goods or store large quantities of products inside. People will often use industrial real estate lending to acquire, renovate or redevelop these buildings.
How to Finance Industrial Real Estate Property
There are many options for financing industrial real estate. Private lenders, banks, credit unions and hard money lenders all accept applications for warehouse and industrial financing. The rate and terms will often depend on the size, location, condition and tenancy of the property. For example, some lenders will shy away from financing single-tenant industrial properties whereas others see the benefit to making loans on multi-tenant industrial facilities.
Here is an overview of the most commonly utilized loan products for industrial property.
Traditional Bank Financing for Industrial Property
Traditional bank loans can be a great source of financing for industrial property acquisitions and renovations. Lenders are generally flexible in loan size with no loan minimum amount. Some banks will also offer loans at 85% or 90% LTV depending on the deal specifics (e.g., long-term tenant with high cash flow). Rates can be at or below market rate, starting as low as 2.5 percent. The downside to using a traditional bank loan for industrial property, though, is that these loans have strict criteria. Borrowers must have excellent credit. These loans also can take time to close, so they are not ideal for someone who needs to move quickly when looking to purchase an industrial building.
CMBS Loans for Industrial Real Estate
CMBS (which stands for commercial mortgage-backed securities) loans are often used to finance industrial real estate. CMBS loans are a form of “conduit” loan in which another lender, usually a traditional bank, will go out and make several loans and then packages them to sell off on the public markets as bonds. The difference between CMBS loans and traditional bank loans or life company loans is that CMBS loans are generally longer-term loans offered on deals with stable cash flows. Another benefit of conduit loans is that these usually don’t have burdensome cash-out restrictions the way traditional bank loans do. This money can be used for a variety of purposes, including remodeling industrial property or investing into the industrial business in owner-occupied situations.
CMBS loans for industrial properties usually have a $2 million minimum with loan terms of five to ten years at fixed-rates with amortizations of 25-30 years. Most lenders will have an 80% maximum LTV and will require a 1.25 to 1.35x debt service coverage ratio (DSCR).
Life Company Lenders for Industrial Property
Life company loans are another way to finance industrial property. “LifeCo” loans, as they’re often called, are low-leverage loans on properties that have existing, stable cash flows. These loans can have some of the best rates and terms but only for properties that meet strict lending criteria. Life companies usually opt for stabilized, well-located and otherwise “safe” investment opportunities. This can make it difficult to get loans on non-premium real estate.
Expect the following terms for life company debt: loan size of $2+ million, with 10-15 year terms at variable interest rates, amortization over 25 years, maximum LTV between 65-75%, with a minimum 1.25x DSCR. Life company loans can be either recourse or nonrecourse loans.
USDA Loans for Industrial Property Financing
Loans from the U.S. Department of Agriculture (USDA) can be used for industrial property financing. These loans are intended to create jobs and stimulate rural economies by providing financial support for rural businesses and properties. USDA loans can be used for many purposes, including purchasing industrial real estate but also for working capital, machinery and equipment. Unlike other types of real estate, industrial businesses often need heavy machinery and equipment so these loans are especially good for that purpose. USDA loans for industrial property financing usually have a minimum loan amount of $1 million with an 85% max LTV. Loans are usually five to fifteen years in length, and amortize over a 15-30 year period. USDA loans are only available for industrial property in rural areas and are almost always require recourse.
Private Commercial Lenders for Industrial Real Estate
Industrial property can also be financed by non-banks and private commercial lenders. Private commercial lenders provide fast funding with less documentation. They are also able to provide greater flexibility to accommodate borrowers with bad credit or in non-conventional situations. That said, private commercial loans for industrial property can come at above-market interest rates, lower LTVs and often have shorter repayment periods. For someone needing money quickly, and who expects to refinance the loan with more traditional, long-term debt, private commercial lenders like iBorrow are a great alternative to standard bank, CMBS or LifeCo loans.
Short-Term Bridge Loans for Industrial Property
Short-term bridge loans are another option for industrial property financing. Short-term bridge loans, which can be structured for as little as three months or three years, are usually a percentage or two more expensive than traditional bank loans but offer borrowers tremendous flexibility. Short-term bridge loans will often max out at 90% LTV, meaning the borrower needs less equity to acquire a property when using a bridge loan. They are often structured to be interest-only which saves the borrower money in the short-term. Bridge loans can usually be closed quickly, especially when offered via a private commercial lender, making them ideal for borrowers with immediate needs.
Industrial property can make a great investment, especially for those with industrial-oriented businesses who plan to owner occupy the property. Industrial business owners, though, are often so wrapped up in the day-to-day of their operations that shopping for industrial loans often falls to the wayside. It is always important to shop around for the best rates and terms, and more importantly, the right type of loan for your specific circumstances.
Contact us to learn more about how iBorrow can help finance your next industrial real estate transaction!