Throughout commercial lending, property
types are generally classified within four different categories: Tier I, Tier II, Tier III and Tier IV. The reason for the
classification is to asses a standard risk involved and collateral value for the property.
I: Multi-family and some mixed-use properties
Multifamily complexes and apartment buildings, with 5 units or more
are in demand with most lenders because they are sound investments with little risk. They tend to generate enough monthly
income to service the debt on a more constant basis than other property types. In addition, if a lender must foreclose on
a multifamily building, it often can be relatively easy to resell. Lenders place certain mixed-use properties in their Tier
I category because the properties offer the same advantages as multifamily units. The commercial component of the mixed-use
site usually dictates whether it falls within Tier I or a lower tier.
- Tier II: Retail buildings,
offices, self storage, mobile home parks, warehouses
While some dry cleaners are merely a
drop shop that sends the cleaning offsite, in house dry cleaners use chemicals that can pose a high environmental risk. Lenders
do not like environmentally sensitive properties because the cleanup can be costly. Some warehouse used for manufacturing
or for industrial purposes can pose the same risk. Another property type that has moved into this category on some instances
is the automotive industry. Although auto shops are considered environmentally sensitive, they are becoming a sound investment
for some wholesalers.
- Tier III: Properties with unpredictable
income generation and are harder to resell.
They include campgrounds, bed&breakfasts and carwashes. Credit
and borrower income play a very important role in getting these loans approved. Fortunately, there are additional stated income/stated
assets loan programs especially targeted for such properties.
- Tier IV: Special or single purpose
Includes day care facilities, hotels, motels, bar, restaurants, funeral homes
and light industrial sites. These are the highest-risk properties and each property carries its own risk factor. For example,
day cares have high insurance liabilities, hotel and motels have dramatic revenue swings and many are seasonal in nature.
Bars and restaurants, unfortunately have tremendous failure rate. All other property types , including gas stations, churches,
non-profits, construction sites, agricultural land and raw land fall into a "difficult to fund" category because
they usually require specific lenders and come with their own unique set of risks associated with them. For example, gas stations
are becoming more difficult to finance because major commercial insurers no longer supply insurance to such environmentally
For a free consultation and analysis on
your current or prospect properties please contact us immediately.