115704 Resource 78777 78860 1071 1139629830224 1215924364538 Controlled Commercial Real Estate Loans and Bond Financing

Bond Financing for Commercial Loans is Not Exotic Anymore

<p>If the commercial real estate loan you are seeking is much smaller than $5 million, bond financing is probably not the best way to finance your commercial property.&nbsp; If you need a fairly large loan, however, bond financing offers a number of advantages.<br /><br />First of all, bond financing can have a custom repayment structure.&nbsp; In addition, floating rate deals can be written with no prepayment penalty.&nbsp; Finally, its cheap money.<br /><br />Suppose a boat manufacturer needs to expand his plant.&nbsp; It will take about a year to build the new plant building and another year to hire new employees, train them, and really ramp up production.&nbsp; The owner of the business, however, hates debt, so maybe he wants to force himself pay the loan off as soon as possible after production gets up and running.&nbsp; A bond can easily be issued that has interest-only monthly payments for two years and then has a fast seven-year amortization thereafter.&nbsp; It might be possible to have high monthly payments in the peak income season and lower payments in the slower months.&nbsp; The point is that the loan, within reason, can be individually structured.<br /><br />Another advantage of bond financing is that a floating rate bond can be written with <span style="FONT-WEIGHT: bold; FONT-STYLE: italic">no prepayment penalty</span>.&nbsp; If the borrower wants to fix the rate, he can do so for a fee, but the loan will have a defeasance prepayment penalty, like a conduit loan.&nbsp; A fixed rate bond deal will have about the same rate as a conduit deal.<br /><br />Floating rate bond financing compares very favorably with conduit financing, with deals being priced on the order of 75 basis points over 30-day LIBOR for the really strong deals to 200 basis points over LIBOR for the more average deals.&nbsp; 30-day LIBOR today (2/10/06) is around 4.4%, so we are talking about floating rates of around 5.15% to 6.4%.<br /><br />Here is how bond financing for commercial real estate works.&nbsp; The borrower applies to a bond financing specialist.&nbsp; This bond financing company will usually have a tax attorney, a bond financing attorney and an investment banker all in-house. <br /><br />The normal commercial loan package is compiled, and the package is submitted to one of about 100 banks in the country with a AAA or AA credit rating that are in the bond financing market.&nbsp; If the bank agrees to guarantee the deal, the attorneys go to work writing the bond.&nbsp; The bond, guaranteed by the strong bank, is then sold through an investment banker in the bond market as a AAA or AA bond.&nbsp; The bonds are typically sold off to yield the investors about the same yield as 30-day LIBOR, and the bank keeps the 75 to 200 bip spread as its fee for guaranteeing the bond.&nbsp; The bond financing company (think of them like a mortgage banker) will typically charge on the order of two points.<br /><br />These bonds do <span style="FONT-WEIGHT: bold; FONT-STYLE: italic">not</span> have to be tax-free.&nbsp; If the owner of a standard office building chooses to seek bond financing - perhaps to get a low rate and no prepayment penalty - he can easily do so.<br /><br />If the proceeds of the bond are being used to create new jobs, however, the bonds can be sold as <span style="FONT-WEIGHT: bold; FONT-STYLE: italic">tax-free bonds</span>.&nbsp; The boat manufacturer described above might easily qualify for tax-free bond financing because he will be hiring a number of new factory workers, and if he does, his interest rate will be significantly lower.<br /><br />The final advantage of bond financing is that it can be used for all sorts of owner-user real estate, including manufacturing plants, that do not fit the usual cookie-cutter mold of a conduit.&nbsp; Suppose you need a loan on a refinery.&nbsp; There is no way that this loan would qualify for a conduit deal, but the borrower could obtain bond financing at very comparable rates.<br /><br />Bond financing involves more paperwork than a conduit deal, so the process takes a little longer.&nbsp; Bond financing, however, is <span style="TEXT-DECORATION: underline">very</span> profitable for the banks issuing the guarantees because they are earning a nice interest rate spread without ever loaning any money.&nbsp; They are just using their balance sheets (their net worths) to guarantee the deal.&nbsp; As a result, bond financing is surprisingly reliable.<br /><br />Because bond financing on commercial real estate is such a specialized field, you cannot apply for bond financing through C-Loans.com.&nbsp; But if you have a deal that seems to fit, please send me, George Blackburne, an email (<a title="Please email me if you have a bond financing deal that seems to fit." href="mailto:george@blackburne.com">george@blackburne.com</a>).<br /></p> 9 application/xml false bond financing commercial financing commercial loan rates commercial loans commercial mortgage commercial mortgage rates commercial real estate loans Apply to 750 Commercial Lenders in Four Minutes http://www.c-loans.com/onlineapp Mozilla/4.0 (compatible; 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