Curious as to how lenders underwrite these types of deals.
Example is a flex industrial (10% office component) property, 100,000 total square feet, purchased by a semi conductor company 5 years ago. They occupy 100% of the property. Purchased property for $20MM, spent an additional $2MM building out the flex space and upgrading the facility. Currently has a $8M mortgage maturing in 6 months.
Seeking a 3-year loan for $12MM (55% of total cost basis), used to repay existing mortgage + $4M to be used by business to upgrade manufacturing equipment and purchase supplies.
Given the nature of the asset, and the fact that a portion of the loan is being used for business purposes, what are the high level underwriting metrics a debt provider would look at to gauge this? Are they underwriting the profitability of the company to determine whether they can make debt service? Is this truly a real estate loan or would it be treated as a combination of real estate and business loan? Would the value of the building (if it were vacated and sold to another owner user or investor) play a role in determine what the loan to value would be?
Not my field of expertise as I don't invest industrial/office, but will provide my thoughts based on my experience working with lenders.
The usual stuff ie LTV, DSCR, maybe debt yield (although I've never come across debt yield when sizing my loans)
They will analyze this like any other real estate loan. I think the mistake you are making is confounding the business with the real estate. Imagine if the owner/business doesn't own the real estate yet, but is looking to acquire the facility. The lender will value and analyze the real estate and then they will evaluate the credit worthiness of the owner/business. So in your scenario, the lender will value the real estate and improvements via commercial appraisal and then evaluate the borrower/business i.e. tax returns, assets/liabilities, etc...
The fact that the owner/business was able to finance $14mm of the acquisition/improvements with straight cash and that the business has been able to service $8mm of debt tells me that this business has pretty strong operations/cash flow (unless $8mm was the maximum debt amount the business could service. If so, then not sure how the business will service $12mm of debt unless it experience significant growth). Given these financials and how low leveraged the property is, I don't think the business should really have an issue obtaining the loan that you are seeking, but can't give a definitive answer without know the financials of the business.
Regarding whether or not this is a business loan or real estate loan, it depends on the lender. If this were just a real estate loan, then what you are seeking is a cash out refi. Since the business is performing strongly and seems to be low leveraged, I don't think you should have an issue obtaining the cash out refi you are seeking. Lenders typically become wary of cash out refi's once LTV's start hitting 70%ish. However, lenders may ask what you intend to do with the $4mm cash out (even though it shouldnt be any of their business) and depending on the lender, they may direct you toward a business loan for that portion. However, in my opinion, since the $4mm is being used for PPE and supplies for the business and it is a relatively small amount compared to the size of the total loan, I think lenders would be fine with the $12mm cash out refi.
Well yes...one of the key numbers needed to determine the Loan to VALUE is the value of the building lol. This is what the commercial appraiser is for.
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