Assets America® provides office building loans and office building financing for a variety of property types, starting with Class A and Class B urban and suburban office buildings, low-rise, mid-rise and high-rise. Properties include single-tenant and multi-tenant office buildings as well as owner-occupied (owner-user) office buildings. We also arrange commercial office building loans for mixed-use buildings, office parks, industrial research and development parks, and professional/medical offices.
In this article, we cover:
- Reasons for Obtaining Office Building Mortgages
- Potential Loan Sources
- Customizable Financing Structures
- Common Terms and Rates
- Medical Office Building Financing
- Glossary of Office Building Mortgage Terminology
- Frequently Asked Questions
- Helpful Online Resources
- Excellent Related Articles
- How Assets America Can Help
Reasons for Obtaining Office Building Loans
The American economy’s rebound following the events of 2008 has led to increasing demand for office space, and therefore for office building financing.
- Expanding Requirements for Work Space: A critical stage in the growth of many companies is the decision to own and occupy their own office building. Accordingly, we invite growing businesses to turn to Assets America for office building purchases and office building loans. This includes office building construction loans and office building acquisition loans, for both tenants and owner-occupied office products. We work to ensure the availability of short-term and long-term capital on the best possible terms. Assets America also refinances existing office buildings that require upgrades or rehabilitation.
- Commercial Use: We also provide investment office building loans for companies looking to build or acquire tenant-occupied office buildings, as well as office condo properties and fix and flip office buildings. We do this for primary and secondary market locations. Office buildings in strategic locations are a reliable source of lease income to investors. In some cases, a company will build or acquire an office building, take some of the space for its own use and lease out the rest. In addition, investors often seek mixed-use office buildings that combine office space with retail and/or residential space.
Office Building Loan Sources
The Small Business Administration offers SBA 7(a) and SBA 504 loan programs for commercial real estate loans, including office building loans. SBA loans typically have the lowest costs, with relatively small down payments and fixed interest rates. SBA 7a typically guarantees bank loans up to 90%, while the 504 program combines 50% bank and 50% government sourcing.
Traditional office building loans are available from regional and national banks if the borrower has excellent credit. Private lenders, including private investment funds, credit union syndicates, life insurers and CMBS offer more flexible terms, easier access and less paperwork, albeit at higher interest rates. They are often the source of bridge loans, which can be used in lieu of hard-to-access construction loans to develop or rehab an office building.
Customized Office Building Mortgages
Assets America® can customize our office building loans to meet a wide range of deal structures of starting at a minimum loan amount of $5 million. Recourse and non-recourse loans are available, with a variety of prepayment terms, including:
- Yield Maintenance: This is a prepayment premium allowing investors to receive the same yield as they would have had the borrower not prepaid the loan.
- Step-Down Prepayment Penalty: A prepayment penalty that steps-down (decreases) over time.
- Defeasance: The substitution of another cash-flowing asset, such as T-Bonds, for the original loan collateral, i.e. the office building.
- No Prepayment Penalty: There are office building loans that have no prepayment penalty as well.
Non-Specific Details for Office Building Financing
Although each office building project is unique, all share a number of characteristics that help define the risks and rewards for both office building lenders and developers. The following are the ones that are fundamental to the evaluation of a request for office building financing.
- Loan to Value Ratio (LTV): 70% to 85% for construction office building loans, and up to 95% on acquisition office building loans.
- Debt Service Coverage Ratio (DSCR): 1.25x or higher, depending on the property’s physical condition, age, tenant mix and comparable properties.
- Term: Construction office building loans up to 18 months and office building loans up to 3 years on bridge loans, 3 years on office building mini-perm loans, and 5 to 30 years on office building loans for permanent financing.
- Amortization: Up to 30 years on office building take-out loans (permanent loans). Construction, acquisition, refinancing and bridge loans are interest-only. These short-term loans are then replaced by mini-perm loans and take-out loans after the rent roll is stabilized between 90% to 95% or hopefully higher.
- Leases: The owner (the landlord and the borrower) of the subject property prefers triple-net (NNN) leasing. In NNN leasing, the lessee (the tenant) is responsible for property taxes, insurance and maintenance. The resulting rental rates can be lower, which in turn spurs higher occupancy rates.
Medical Office Building Loans
A special class of office real estate is the medical office building (see below picture). These buildings can be either stand-alone or part of an office medical park. Medical office buildings might contain a variety of offices for physicians, specialists, labs and clinics. Medical office building projects are highly desirable, as they usually feature high occupancy rates and long-term leases. Nonetheless, the need for new medical office buildings continues to rise because of population shifts, increasing population and of course, obsolescence of older office buildings.
Medical office building loans have some unique and special features. For example, the DSCR typically starts at 1.20, slightly lower than regular office buildings. Another feature of medical office building loans is that we can loan up 90% loan to value, higher than many regular office building loans. The slightly relaxed financing requirements for medical office building loans reflects the stability of that market segment. They have high occupancy rates, and tenants often remain loyal for decades. The advent of the Affordable Care Act also created more demand from insured individuals for medical care. In turn, this has translated into a higher level of medical office building construction. However, it seems that legislators may eventually remove the ACA from existence.
Frequently, developers cluster medical office buildings inside medical parks. Typically, these medical parks have a hospital, emergency room or acute-care facility at their center. Medical office building construction must suit the needs of medical practices. Often, this includes a preference for high energy efficiency, modern and attractive layouts, and provisions for the latest technology. Frequently, a single major lab services the entire medical park and handles the lab requirements of multiple practices. This saves resources and most importantly, it can save substantial money.
Similarities Between Office Building Loans & MPC Loans
Office medical park loans resemble master-planned communities loans, in that construction loan facilities are revolving sources of funds that pay for the construction of a building and then paid off by mini-perm loans. Typically, construction loans are interest-only loans. The mini-perm payoff then replenishes the construction funding for the next set of buildings. Eventually, the mini-perm loans are taken out by the permanent financing with amortization periods of up to 30 years.
Office Building Loans from Assets America®
Many of our customers turn to us for commercial mortgage bridge loans to finance the construction or rehabilitation of office buildings. While commercial mortgage bridge loans have higher interest rates than construction loans from banks, they are much easier to access. Don’t fear if your credit profile doesn’t meet bank requirements. We can arrange an interest-only, commercial bridge loan for up to 18 months or longer. We can then arrange mini-perm loans for up to three years. Subsequently, a take-out loan (a permanent loan) can run up to 30 years. However, most borrowers pay down takeout loans much faster.
Glossary of Office Building Loan Terms
BREEAM An acronym for Building Research Establishment Environmental Assessment Method, the world’s leading sustainability assessment method for infrastructure
Class A Buildings Subdivided between Class A+ and Class A buildings, these properties benefit from high-quality builds, great location, excellent management, and typically feature high-quality tenants
Class B Buildings Properties that are a bit older, but retain a good location and professional management
Commercial Mortgage-Backed Securities (CMBS) A type of security backed by mortgages on commercial properties, rather than residential real estate
Coworking Space Shared office space among different businesses and/or individual freelancers
Fitwel An infrastructure rating system for commercial interiors based on the principles of operating well-designed buildings for the well-being of humans
Gross effective rent Rent due according to a lease, including all incentives
Gross face rent
Rent due according to a lease, not including all incentives
T-Bond An abridged version of Treasury Bond, which is a fixed-interest debt security from the United States government
WELL Building Standard A certification from The International WELL Building Institute, the oldest provider of such rating systems worldwide
Frequently Asked Questions – Coworking & Office Building Loans
Co-working is the shared use of office space, in some cases replete with amenities, that allows diverse parties to work synergistically in a hassle-free work environment. Individual freelancers seeking an out-of-home office also use co-working spaces. Co-working spaces tend to be highly valuable, per square foot, and fetch leasing payments to match. For office building owners, the primary drawbacks include short leases (typically a year) and the need to provide numerous amenities. Often coworking spaces require active, hands-on management to ensure everything remains up to speed for those using the space. Basic amenities include desks, coffee & snack options, conference rooms, printers, mail service, and reliable, high-speed Wi-Fi. Beyond that, coworking spaces may include private booths for phone calls, a break area, diverse seating options, natural light, outdoor space, and 24/7 availability. Many coworking spaces provide an innovative and enticing list of luxury amenities. Often coworking spaces double as event venues for networking and small conferences. Typically, clients prefer coworking spaces for their location, flexibility, scalability (ability to lease more or less space), and ability to take care of all the minor day-to-day concerns, like fresh coffee. The widespread opinion is yes. As the business world moves increasingly toward location-independence, especially given the rising tide of freelancers, coworking spaces should continue to play an increasing role for office buildings.
Co-working is the shared use of office space, in some cases replete with amenities, that allows diverse parties to work synergistically in a hassle-free work environment. Individual freelancers seeking an out-of-home office also use co-working spaces.
Co-working spaces tend to be highly valuable, per square foot, and fetch leasing payments to match.
For office building owners, the primary drawbacks include short leases (typically a year) and the need to provide numerous amenities. Often coworking spaces require active, hands-on management to ensure everything remains up to speed for those using the space.
Basic amenities include desks, coffee & snack options, conference rooms, printers, mail service, and reliable, high-speed Wi-Fi. Beyond that, coworking spaces may include private booths for phone calls, a break area, diverse seating options, natural light, outdoor space, and 24/7 availability. Many coworking spaces provide an innovative and enticing list of luxury amenities.
Often coworking spaces double as event venues for networking and small conferences.
Typically, clients prefer coworking spaces for their location, flexibility, scalability (ability to lease more or less space), and ability to take care of all the minor day-to-day concerns, like fresh coffee.
The widespread opinion is yes. As the business world moves increasingly toward location-independence, especially given the rising tide of freelancers, coworking spaces should continue to play an increasing role for office buildings.
Online Resources for Office Building Financing
- First, Lee & Associates published an article on 2018 Trends in Office Construction.
- Secondly, the primary databases to search for office buildings for sale are LoopNet and Ten-X Commercial, but the best way to search for office buildings for sale in your area is to find a regional or citywide database via Google.
- In addition, the infrastructure certification systems mentioned in the glossary—Fitwel, WELL Building Standard, and BREEAM—have excellent websites with plenty of resources for those interested in the healthy building movement.
- You can also read this TRD article for a list of high-end commercial office building loans in NYC.
- Finally, the Commercial Construction Loan Calculator provides a complete breakdown for the repayment process.
Related Articles for Office Building Mortgages
In conclusion, if you are interested in arranging financing for high-rise office building loans, medical office building loans or any of the myriad of office building mortgages we offer, then we urge you to contact Assets America® today for an in-depth discussion. Finally, we are confident that we can obtain excellent terms on an office building loan that fits your requirements like a glove, no matter how detailed and complex your request. Please call (206) 622-3000!