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Limited Options Strangle Restaurant Loans

From a conventional stand point restaurant loans are taking the worst of it as the credit crisis has seemed to have worsen. Special use properties such as restaurants are always the first to feel the tightening as the process to sell the facility in case of borrower default is more difficult that your typical general use property that will have a wider pool of buyers.

Conventional financing for restaurants, meaning loan issued directly by the funding banks, without any guarantee by the SBA or other such institutions, are getting very conservative. Loan to values are hover at 55% on refinances and 60% on purchases. Debt coverage ratios have tightened as well from a 1.25 to a 1.3 and with some banks a 1.4. Meaning that for every $1 of proposed mortgage debt the borrower would still have $.40 left over after all expenses and proposed mortgage have been paid.

In addition, the cap rates have really been taking a beating with conventional sources. For example, I recently spoke to a bank loan officer that said they are putting on a minimum 10% capitalization rate on all restaurants regardless of the market.

The solution is to think non conventional for either purchase or refinance money. For example it’s still possible to get 85% financing on purchases on a 5 year fixed 25 year amortization loan, if you work through the right sources.

One loan program that deserves mention is the SBA 7a loan as it was designed for niche building types like restaurants, motels, etc. They can go as low as a 1.1 debt coverage ratio, and business projection can be used to supplement cash flow if it’s too low to meet the guidelines. Which in a cash business like restaurants, where most owners understate there income is very important.

CMBS sources are still out there though on a limited basis. For example, a 30 year fixed rate mortgage at 80% financing is still available. Primary benefit of course is that the borrower doesn’t have to worry about their rate fluctuating.

Author: Jeff Rauth
Article Source: EzineArticles.com
Provided by: Excise Tax

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