What are the commercial property classifications and how do they impact your loan?

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.

  • Tier 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 use properties
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 sensitive properties.
For a free consultation and analysis on your current or prospect properties please contact us immediately.