How to get 100% Financing

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For All Your Commercial Deals

I’ve gotten a number of requests lately asking for 100% financing for a commercial real estate project.  If you are among the many individuals who are seeing the opportunity in commercial real estate and are trying to get your first deal funded, this article is for you, so read on!

The 100% funding requests I’m seeing seem to fall into two categories:  (1) construction loans; (2) apartment purchase + rehab.  These are two different scenarios, but the approach is similar. I will address them one at a time.

Before I get there, let me talk in general about what lenders are funding today.  In the current economic environment, it is a lender’s market. What this means is lenders are picking the best deals to finance.  Here’s what a good deal looks like to a lender:

  • Low loan to value (LTV) based on as-is value, usually 65% or less
  • Strong borrower–one who has high net worth, strong credit, cash liquidity to cover shortfalls and contingencies
  • “Skin in the Game”–meaning the borrower is putting up some of the money his or herself.
  • Strong property, or good deal, meaning positive NOI, good debt service coverage, at or near market stabilization.

Of course, these are not necessarily the projects that investors think are good deals, so you have to have two perspectives.

Here’s the $64,000 question:  What if I find a deal that is a distressed property, needs renovation, is below market occupancy, has little or even negative net operating income, and I can buy it for cheap!  How do I get it financed?

In residential real estate, if you are buying a house to renovate, there’s a formula that most hard money lenders will allow:  the maximum they will loan you is 65% of the after repair value (ARV).  This means the purchase amount plus the rehab amount together must be less than 65% of the value the property will appraise for after it is all fixed up.  Unfortunately, in commercial real estate, this doesn’t work the same way.  Almost all lenders are looking for you to have “skin in the game,” so if you want to come in with 100% financing, you need to take a different route.

Here are some ways to put 100% financing together:

  1. Find a partner who has cash!  Let the partner put in the down payment and/or renovation money for a share of the back end.
  2. If you can’t find a single partner, find multiple partners.  These are members of your LLC, or shareholders of a corporation.  Please NOTE:  in order to do this correctly and legally, you will need to consult a securities attorney who will advise you as to how to do a private placement to raise this kind of money.  It’s not hard and it’d done frequently in commercial real estate.
  3. Use seller financing for part of the down payment.  Most private commercial lenders will allow this, although they still want you to have about 10% of your own money in the project.
  4. Use some combination of 1, 2 and 3!  This is known as a “capital stack” and is also fairly common in commercial projects.  In other words, you put together some debt financing (up to 65% LTV) and then use equity partners, and/or seller financing for the rest.

Now, a special note on construction financing.  The same techniques that I’ve just described work really well for commercial construction.  One developer I’ve known for years does the majority of his financing of new projects through a private placement, and then uses bridge loans for later phases as the first units are sold off or rented out.

One special caveat for construction funding today–unlike existing structures, there is no cash flow coming from the property, so lenders are looking to the borrower(s) to have high net worth, and liquidity, in some cases equal to the amount of the loan.  Notice that in the above strategy, the developer is using equity first, and then as the cash flow builds, he is able to go to the bank and get debt financing.

Please send us your comments and questions!  We look forward to working with you to help structure the financing on your next project.

6 Comments to "How to get 100% Financing"

  1. Sharon's Gravatar Sharon
    August 15, 2012 - 3:59 am | Permalink

    Hello my name is Sharon Pascal and I am a real estate investor who’s trying to get her feet wet in the game and I am desperately looking for funding for a cash deal I would like to do in Brooklyn, NY it is a one family converted into a mother daughter one bed room rental downstairs totally re gutted. I am looking to obtain that property wondering if I can do a cap loan for the money I don’t have to but into the deal. It will be for a short term loan 2-6months. I will refi the house for a buy and hold. please advise

  2. Jay's Gravatar Jay
    February 25, 2013 - 8:53 pm | Permalink

    Hi Barbara,

    Great article. Couple of questions. 1) Some folks describe “commercial loans” to be multi-family units above 10+ units. Others say 6+ units are considered commercial. How many minimum units do you require for your loans? 2) I’m looking for capital partners to create a “syndication of funds”, is this similar to a “private placement?”

  3. Lionel Ward's Gravatar Lionel Ward
    November 27, 2013 - 12:21 am | Permalink

    Great article on “How to get 100% Financing”! May I use it to give to other investors who are looking for 100% financing.

    I am an Independent Financial Consultant and I mediate loans/equity for principals and other investors.

    I would like to be an affiliate.

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