A. Income Property Types

1.  General Use or General-Purpose Properties

These properties are versatile and can accommodate multiple tenants or alternative uses, making them more attractive to lenders.

Examples include:

• Apartments
• Office Buildings
• Retail Centers and Outlets
• Shopping Centers
• Industrial Facilities (multi-purpose)

Why Lenders Prefer Them:

General-purpose properties offer greater debt security because they can be repurposed or leased to different types of tenants.  As a result, loan rates and terms are typically more favorable for borrowers when the collateral qualifies as general use.

2.  Special Use or Special Purpose Properties:

These properties are designed for a specific function and are harder to repurpose, which increases lender risk.

 Examples include:

• Churches
• Hotels/Motels
• Restaurants
• Service Stations
• Nursing Homes
• Theaters
• Bowling Alleys

3.  Sources of Income Property Loans

• Banks
• Thrifts
• Life Insurance Companies
• Often operate through conduit correspondents
• Mortgage-Backed Securities (MBS)
• Backed by pools of underwritten multifamily and commercial loans
• Utilize correspondent networks and commercial mortgage conduits
• Loans are aggregated, pooled, and sold for profit through securitization technology
• Large Pension Funds
• Private Money
  • Individual lenders
  • Fractional loans from 2 to 10 investors
  • Securitized mortgage pools
• Mortgage Brokers
• Government-Sponsored Programs
  • Direct securitization
  • Credit enhancement via government subsidy
  • Taxable and non-taxable bond programs
• Fannie Mae multifamily Housing Programs
• SBA (Small Business Administration) programs

4.  Understanding the different types of income property or commercial loans, such as fully amortizing fixed- and adjustable-rate options, helps the audience feel more confident in choosing the right financing for their needs and makes informed decisions.

·         Fully Amortizing – Fixed Rate

·         Fully Amortizing – Adjustable Rate

·         Interest-Only Loan with Balloon Payment

·         Partially Amortized Loan (Bullet or Balloon Payment)

·         Bridge / Gap Loan

o   Construction loan to build the property

o   Mini-perm or bridge loan for 1–3 years until the property stabilizes and qualifies for permanent financing

·         Accrual Loan (Negative Amortization / Bow Tie Loan)

o   Initial payments are below normal amortization, causing unpaid interest to accrue and increase the principal balance

·         Interest Reserve Loan

o   A reserve account is funded from the original loan to cover interest payments during lease-up, renovation, or construction

o   Requires careful estimation to avoid renegotiation

·         Participating Loan

o   Lender receives interest plus an equity participation (“equity kicker”) in future profits

5.  What is a Bridge Loan?

A bridge loan (also called a gap loan or mini-perm loan) is a short-term financing solution designed to “bridge” the gap between two stages of a real estate project.  It provides temporary funding until the Borrower secures permanent financing or sells the property.

6   Key Characteristics

• Term: Typically, 6 months to 3 years.
• Purpose: Used during transitional periods such as:
• Construction phase before stabilization.
• Lease-up period for a newly built or renovated property.
• Acquisition of a property when permanent financing is not immediately available.
• Collateral: Secured by the property being financed.
• Interest Rate: Higher than permanent loans due to increased risk and short duration.
• Repayment: Often interest-only with a balloon payment at maturity.

7.  When Are Bridge Loans Used?

·         Construction Financing:

o   Developer builds a property but needs funds before qualifying for a long-term mortgage.

o   Example: A multifamily building under construction that won’t generate income until lease-up.

·         Mini-Perm Financing:

o   After construction, the property may need 12–36 months to stabilize occupancy and income before permanent financing.

o   Bridge loans cover this interim period.

·         Acquisition Opportunities:

o   Investors buy a property quickly (e.g., foreclosure or auction) and later refinance with a conventional loan.

Advantages

• Speed: Faster approval and funding compared to permanent loans.
• Flexibility: Can include interest reserves to cover payments during lease-up.
• Opportunity: Allows borrowers to act quickly on time-sensitive deals.

Risks

• Higher Cost: Interest rates and fees are significantly higher than long-term loans.
• Short Timeline: If the property doesn’t stabilize or refinance in time, the Borrower faces balloon payment risk.
• Market Conditions: If permanent financing becomes unavailable due to economic shifts, the Borrower may be stuck.

Real-World Example

• A developer acquires land and begins construction on a retail center.  They secure a 24-month bridge loan to cover construction and initial lease-up.  Once occupancy reaches 80% and income stabilizes, they refinance into a 20-year permanent loan at a lower interest rate.

8.  Fixed vs. Adjustable-Rate Loans in the context of income property financing:

Fixed-Rate Loans

• Definition: A loan where the interest rate remains constant for the entire term.
• Key Features:
• Predictable monthly payments.
• Easier budgeting for borrowers.
• Typically offered for long-term financing (10–30 years).
• Advantages:
• Protection against interest rate increases.
• Stability for investors seeking a consistent cash flow.
• Disadvantages:
• Initial rates may be higher than adjustable options.
• Less flexibility if market rates drop significantly.
• Best For: Borrowers who plan to hold the property long-term and want certainty in debt service.

Adjustable-Rate Loans (ARMs)

• Definition: A loan where the interest rate changes periodically based on a benchmark index (e.g., SOFR, Treasury rates).
• Key Features:
• The initial “teaser” rate is often lower than fixed rates.
• Adjustment periods can be monthly, quarterly, or annually.
• Advantages:
• Lower initial payments.
• Potential savings if rates remain stable or decline.
• Disadvantages:
• Payment uncertainty—rates can rise sharply.
• Harder to predict long-term costs.
• Best For: Short-term investors or those planning to refinance before adjustments occur.

9.  Comparison Table

10   Comparing fixed vs. adjustable commercial loan rates for a $5 million property based on current December 2025 market data:

Fixed-Rate Loan Example

• Loan Amount: $5,000,000
• Term: 10 years (amortized over 25 years)
• Rate: 6.07% fixed (typical for office/retail properties)
• Monthly Payment: About $32,700 (principal + interest)
• Balloon Payment: Remaining balance due at the end of the term (≈ $3.9M if amortized over 25 years).
• Pros: Predictable payments, protection against rising rates.
• Cons: Higher initial rate compared to adjustable options.

Adjustable-Rate Loan Example

• Loan Amount: $5,000,000
• Term: 10 years (amortized over 25 years)
• Initial Rate: 5.16% for first 5 years (multifamily/large loan pricing)
• After 5 years, rates are reset annually based on SOFR or a Treasury index plus a margin (e.g., +2.50%).
• Monthly Payment (Years 1–5): About $29,900
• Risk: If rates rise to 7% after being reset, payment jumps to ≈ $34,800.
• Pros: Lower initial payments; suitable for a short-term hold or a refinance strategy.
• Cons: Exposure to interest rate volatility.

Bridge Loan for Comparison

• Loan Amount: $5,000,000
• Term: 24 months
• Rate: 9.00% interest-only
• Monthly Payment: About $37,500 (interest-only).
• Purpose: Short-term financing during lease-up or before a permanent loan.

Key Insight

• Fixed rates (≈ 6.0–6.5%) offer stability but cost more upfront.
• Adjustable rates start lower (≈ 5.1–5.5%) but carry risk if rates climb.
• Bridge loans are much higher (≈ 9–13%) and should only be used for the short term.

In an adjustable-rate loan (ARM), the interest rate changes periodically based on a benchmark index (such as SOFR, Treasury, or LIBOR).  The margin is a fixed percentage that the lender adds to that index to determine your actual interest rate after the initial fixed period.

How It Works

• Formula:
  Interest Rate = Index + Margin
  Example: If SOFR is 3.00% and the margin is 2.50%, your rate becomes 5.50%.
• Margin Characteristics:
• Fixed for the life of the loan (does not change even if the index fluctuates).
• Represents the lender’s profit and risk buffer.
• Typically, it ranges from 2.00% to 3.00% for commercial loans.

Why It Matters

• The margin determines your floor rate—even if the index drops to zero, you’ll still pay the margin.
• Higher margins mean higher overall costs, especially when rates rise.
• Margins vary by:
• Loan type (multifamily vs. office).
• Borrower risk profile.
• Loan-to-value (LTV) and property performance.

Example

• Initial Period: 5 years at 5.00% fixed (intro rate).
• Adjustment: After 5 years, the rate resets annually:
• Index (SOFR): 3.25%
• Margin: 2.50%
• New Rate: 5.75%
• If SOFR rises to 4.50%, your rate jumps to 7.00%.

The Margin Impact chart shows how different loan margins affect the monthly debt service as the index rate moves.  I assumed a $5,000,000 loan with 25-year amortization and plotted both amortizing and interest-only payments for margins of 2.0%, 2.5%, and 3.0% across index rates from 2.0% to 6.0%.

Key Assumptions

• Loan amount: $5,000,000
• Term (for amortizing calc): 25 years (300 months)
• Effective rate = Index + Margin
• Payments:
• Interest-only: Payment = Loan Amount X Rate / 12 =
• Amortizing: Use the amortization formula
• Where is the annual effective rate, and what are the total months?

Snapshot Table (Selected Index Points)

Index          (%) Margin     (%) Effective Rate       Amortizing Payment          Interest-Only Payment

3.0                     2.0                     5.00%                  $29,230                               $20,833

3.0                     2.5                     5.50%                  $30,704                               $22,917

3.0                     3.0                     6.00%                  $32,215                               $25,000

4.0                     2.0                     6.00%                  $32,215                               $25,000

4.0                     2.5                     6.50%                  $33,760                               $27,083

4.0                     3.0                     7.00%                  $35,339                               $29,167

 End of Chapter II