Interest rates for commercial real estate loans can fluctuate frequently, sometimes daily. These changes are heavily influenced by the Federal Reserve’s monetary policy, economic conditions, and financial markets. A key benchmark is the 10-Year Treasury yield, which guides lenders in setting rates. When Treasury yields rise, commercial loan rates typically follow, making it crucial to monitor these indicators when planning financing.

Commercial loan rates are shaped by:

1. Economic Conditions: Inflation, employment, and GDP growth directly impact borrowing costs.
2. The Capital Market: The availability and cost of funds influence the supply of loans.
3. The Space Market: Property specific factors, like rental income, vacancy rates, and tenant creditworthiness, also affect terms.
4. Lender Risk Appetite: Banks and private lenders adjust rates based on their tolerance for risk and current market conditions.

• Recourse Loan: If you default, the lender can seize the collateral and pursue your personal assets to recover losses. These loans often come with more flexible terms but carry greater personal liability.
• Non-recourse Loan: The lender’s recovery is limited to the collateral property. Non-recourse loans protect personal assets but may require stronger property financials and lower loan-to-value ratios.

LIBOR, a widely used benchmark for loan rates, is being replaced by SOFR (Secured Overnight Financing Rate). Unlike LIBOR, which is based on estimated interbank lending rates, SOFR is derived from actual transactions backed by U.S. Treasury securities, making it more reliable. While SOFR is considered more stable, its daily variability might require adjustments to loan structures, such as incorporating average SOFR rates to reduce volatility.

NNN Leased Properties:

• Benefits: Predictable income streams as tenants cover property taxes, insurance, and maintenance. Easier to finance due to lower risk for lenders.
• Challenges: Generally require high-credit tenants and may have lower initial yields.

Gross Leased Properties:

• Benefits: Higher cap rates and more opportunities for value-add strategies, such as converting gross leases to NNN leases.
• Challenges: Landlords are responsible for expenses, which can reduce cash flow.

• Loan Amount: Minimum loan amounts typically start at $2 million, with no strict upper limit, though loans often exceed $100 million for larger properties.
• Debt-Service Coverage Ratio (DSCR): A minimum of 1.25x, ensuring sufficient property income to cover debt obligations.
• Loan-to-Value Ratio (LTV): Usually capped at 70-75% of the property’s appraised value.
• Property Type: Stabilized, income-producing properties such as retail centers, office buildings, or industrial facilities.
• Borrower Track Record: Demonstrated experience in managing similar types of assets.
• Occupancy Levels: Stable or growing tenant occupancy is essential.