Today’s rates for a wide range of commercial property and loan types.
Check Today's Rates →
Value-Add Commercial Properties
Value-add refers to the purchase of a building for the purpose of adding value. Value-add may come from lowering operational expenses and increasing revenue.Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!
Commercial Property Loans and Bridge Loans for Value-Add Commercial Real Estate Opportunities
Value-add refers to the purchase of a building for the purpose of adding value. Value-add may come from lowering operational expenses and increasing revenue. It also may come from rehab and CapEx investments, or even repurposing a property altogether (think an extended-stay motel to a market-rate apartment complex). The end value can be in the form of increased net operating income, cap rate compression, or any number of items that ultimately lead to a short-term increase in value.
There are risks associated with a value-add property in commercial real estate. As with construction financing, value-add opportunities are pro-forma based. That means that it's all about what is projected to happen. Sometimes, the property is operating well enough that an investor can get a loan based on existing and historical operations. But sometimes, a higher LTC is required for investment into the property, which means greater risk to lenders. In the end, properties like that become the collateral for commercial bridge loans.
Generally speaking when an investor takes out a commercial bridge loan, it is an interest only loan that is based on LTC (vs LTV) because it requires additional investment (TI/LC, CapEx, Rehab, etc.). The goal of the bridge loan is to bridge the gap between the as-is use and value to stabilization at which point an investor can either (a) refinance the property, usually recouping a great deal of equity, with permanent long-term financing or; (b) sell the property at stabilization for maximum velocity of capital.
Looking For a Bridge Loan Quote For a Value-Add Opportunity?
What are the benefits of investing in value-add commercial properties?
Investing in value-add commercial properties can provide higher returns and more growth opportunities than other types of investments. Value-add investments can generate returns between 11% and 15%, while investors are likely to use leverage between 60% and 75%. These investments can also be located in growing or supply-constrained markets, which can provide additional upside.
For more information, please see the following sources:
What types of value-add commercial properties are available?
Value-add commercial properties are typically buildings that have potential for increased value through upgrades, renovations, or repurposing. These properties may have little to no cash flow at the time of acquisition, and are typically located in growing or supply-constrained markets. Examples of value-add commercial properties include extended-stay motels that can be repurposed into market-rate apartment complexes, or buildings that require CapEx investments to increase net operating income or cap rate compression.
When an investor takes out a commercial bridge loan for a value-add property, it is usually an interest-only loan based on Loan-to-Cost (LTC) rather than Loan-to-Value (LTV). This is because additional investment is required for Tenant Improvement (TI/LC), CapEx, Rehab, etc. The goal of the bridge loan is to bridge the gap between the as-is use and value to stabilization, at which point the investor can either refinance the property with permanent long-term financing or sell the property at stabilization for maximum velocity of capital.
What are the risks associated with investing in value-add commercial properties?
Value-add investments are higher-risk investments, but they also provide more growth opportunities. Some of the risks associated with investing in value-add commercial properties include:
- Little to no cash flow at the time of acquisition
- Significant management and occupancy issues
- Higher risk tolerance
Additionally, investors should be aware of the following tips when investing in value-add commercial properties:
- Position yourself for success
- Make informed decisions
- Maximize your success in the market
What are the tax implications of investing in value-add commercial properties?
Investing in value-add commercial properties can have significant tax implications. Depending on the type of investment, investors may be subject to capital gains taxes, depreciation recapture taxes, and other taxes. It is important to consult with a tax professional to understand the full implications of investing in value-add commercial properties.
For example, investors may be able to take advantage of the 1031 exchange, which allows them to defer capital gains taxes on the sale of a property by reinvesting the proceeds into a similar property. Additionally, investors may be able to take advantage of depreciation deductions, which can help reduce their tax burden.
It is important to understand the tax implications of investing in value-add commercial properties before making an investment. Consulting with a tax professional can help investors make informed decisions and maximize their returns.
What are the financing options for value-add commercial properties?
For value-add commercial properties, there are a range of financing options available. These include bridge loans, hard money loans, and HUD 221(d)(4) loans. Bridge loans are short-term loans that are used to finance the purchase of a property until a more permanent financing option is secured. Hard money loans are short-term loans that are backed by the value of the property, rather than the borrower's creditworthiness. HUD 221(d)(4) loans are reserved for extensive property rehabs. Additionally, Freddie Mac Value-Add Loans can provide capital to upgrade a property by between $10K and $25K per unit.
When taking out a commercial bridge loan, it is usually an interest only loan that is based on Loan-to-Cost (LTC) rather than Loan-to-Value (LTV). This is because it requires additional investment (Tenant Improvement/Lease Commencement, Capital Expenditure, Rehabilitation, etc.). The goal of the bridge loan is to bridge the gap between the as-is use and value to stabilization, at which point an investor can either refinance the property with permanent long-term financing or sell the property at stabilization for maximum velocity of capital.
How can I maximize the return on my investment in value-add commercial properties?
Maximizing the return on your investment in value-add commercial properties requires careful consideration of the costs and benefits of different upgrades. Aim for upgrades that offer your tenants a noticeable improvement in quality but are also easy to keep up with. Additionally, you should consider your upfront as well as recurring costs when making decisions about upgrades. For example, if you decide to add a new amenity to an office property, you'll need to take into account the cost of building out the space and purchasing equipment, as well as the cost of any on-site staff needed to manage the amenity.
You may also want to consider financing options to help you fund your value-add investments. Commercial real estate loans can provide the capital you need to purchase and upgrade properties. Depending on the loan product you choose, you may be able to access funds for both short-term and long-term investments. For example, bridge loans can provide short-term financing for value-add investments, while permanent loans can provide long-term financing for larger projects.
By carefully weighing the costs and benefits of different upgrades and considering financing options, you can make informed decisions about which investments are most likely to add value to your property and maximize your return.