What To Look Out For In Your Next Bank Deal
Banks are a great source of capital when it comes to commercial real estate lending. Generally, a borrower can secure a 5-year fixed rate term loan with relative ease and a feeling of confidence that the loan will close due to their relationship with the banker. Also, you likely have most of your company’s deposits located there, so the bank has an established comfort level with the borrower’s financial health. If your company’s deposits are not in that bank, you will likely be required to create a significant deposit relationship as a condition of making the loan.
A bank loan often serves as a capital source for a short-term, value-add acquisition which needs to close quickly. However, for a stabilized asset with a long-term hold business plan, a permanent lender, such as a life company, will be a better option.
Advantages of Life Company Loans
• Your bank has or will require your deposits. During the closing process, a DACA (Deposit Account Control Agreement) will be signed by the borrower. A DACA is a closing document and allows your bank to trigger a change in account control based on the loan conditions on all existing and future cash that flows to that account.
• Life Companies do not require a DACA agreement to be signed.
• Life Companies do not require a new deposit relationship be established, which avoids the hassle of moving accounts.
Loan Covenants / Call Provisions / Risks
• Most bank loans will have ‘property health’ call provisions in the loan documents and include some or all of the following covenants, which will trigger a loan default if breached:
·Minimum property operating income
·Minimum DCR ratio
·Minimum property occupancy
·Minimum property value
·Borrower minimum net worth/liquidity
·Guarantor minimum net worth/liquidity
• Life Companies do not contain any ongoing ‘property health’ call provisions in their loan documents. As long as you pay your mortgage, the lender cannot call the loan.
• Banks generally will fix the interest rate for a maximum of 5 years. If the borrower wants a 10-year loan, the rate will likely reset after the first 5 years.
• Life Companies make fixed rate loans to current market from 5 – 30 years; mitigating interest rate risk for the borrower over your intended hold period.
Life Company loans are not a suitable capital source for every asset. If the property has good, stable occupancy history and you want to own the asset for more than five years, we encourage you to explore all available fixed rate options in the market to ensure you make the best decision.