Historically, from the borrower's perspective, financing restaurants properties has been cumbersome with limited loan options. Further on restaurant loan refinances, borrowers face even more limitations as the SBA (a leader in financing this building type) typically does not perform refinances. Borrowers are left with a limited pool of lenders that remain cautious within this category and offer conservative underwriting guidelines, like max 60% loan to value and debt coverage ratios of 1.4 or more.
Despite these restrictions owners do have some new loan programs that have become available in the last few years. 30 year amortizations as well as stated income loans are a few examples. From the lenders perspective, the special use nature of the buildings themselves, as well as the relative high rate of bankruptcy/foreclosures within the restaurant industry makes lenders cautious. Another issue is the high level of seller financing which further complicates and creates additional risk for banks.
Underwriting focuses on traditional fundamentals, loan to value, debt coverage ratio, strength of tenant, credit worthiness of borrower, and property analysis to make their funding decision.
Debt Service Coverage Ratio restrictions are typically conservative at 1:1.3 to 1:1.4 for this building type. Meaning that for every $1.30 of net income (income after taxes, insurance, repairs, etc) the property produces, the mortgage payment will not be allowed to exceed $1.00. Said in another way, after all expenses and the mortgage have been paid, the owner will need to net $.30 to qualify for the refinance.
Due to the cash nature of this business, stated income loans, (where borrower does not have to provide tax returns) can be a solid option for owners that do not show enough net income to qualify for traditional loans. With this type of loan the DSCR discussed above is not relevant.
Loan to value restrictions on restaurants refinances are typically capped at 60% on both rate and term or cash out refinances. However, there are lenders that will allow high leverage with seller held financing (sits in second lien position). The combined loan to value can be as high as 90%. For example, if the current first lien position existing convention loan is at 40% loan to value and the seller held is at 30% loan to value the owner could pull an additional 20% equity out on a cash out refinance on the first position loan (40% + 30% + 20% =90% CLTV).
In the case of investment restaurant refinances, tenant evaluation is important but not as critical as it is on some property types. Lenders may request tenant financials as well as borrower financials and scrutinize the time left on the current lease; among other information.
Great caution will typically be used as market value and market rent is evaluated and compared to the subject property. Value is typically calculated in the most conservative of manors. Some lenders will want to use the value of the building in its shell condition. Basically if the borrower defaults the lender wants to be guaranteed that the value will still be there if they have to strip the building down to its studs. Age, appearance, location, accessibility, and local market conditions, as well as other factors are important as well.
The personal credit worthiness of the borrower will be scrutinized. 680 credit score is normally the minimum for the best finance options. Exceptions can be made (on a limited basis) as some conventional lenders will consider scores as low as 640. The net worth and experience of the borrower will make a major difference as well. Lenders will almost always require personal guarantees. Normally lenders will want to see a minimum of 2 years management/ownership experience to qualify.
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Bloomfield Hills. He specializes in Commercial Real Estate Loans between $100,000 - $5,000,000. Offers unique loan programs such as Commercial 30 Year Fixed and 90% non SBA financing, Commercial Private Money, Commercial Equity Lines and Commercial Second Mortgages. He can be reached at 248 990-7602. Restaurant Property Refinance or http://www.commercial-second-mortgage.com