Top Mixed-Use Property Loans Guidelines & Qualifications

Top Mixed-Use Property Loans Guidelines
November 12, 2020

Mixed-use property loans are commercial real estate loans intended to help investors and businesses finance their purchase of a mixed-use building. Properties that qualify for financing need several different units zoned for different purposes: residential, commercial, institutional, or industrial. These loans can short-term or long-term, with terms ranging from as short as six months to as long as 30 years.

What Qualifies as Mixed-Use?

There is often confusion about what a mixed-use property is, so let’s explain this further. Mixed-use property loans are for commercial properties that encompass at least two zoned purposes. A building housing both retail and residential uses, for example, is considered to be a mixed-use building. Another example is a building that houses both retail and office space. A retail shop that has apartments above also falls under the mixed-use category. In the same vein, a building in which one area serves as a warehouse for one company and another as office space for another company is considered mixed-use.

Almost any property with at least two units for different uses qualifies for a mixed-use loan. Most properties have at least one residential and one commercial unit, thereby working as a live/work property or investment. A two-unit funeral home with living space at the back where the funeral director can live is considered a mixed-use building. So is a larger property that has one or two retail shops below and several residential units above. If less than 40% of the income from your stuff comes from the commercial spaces and it has at least five residential units, it may qualify for a multifamily loan, too.

Need a list? Below are some of the most typical missed-use property types that can be financed with mixed-use property loans:

  • Main street commercial and residential – These are two- to three-story buildings with street-facing commercial units on the ground floor and residential units on the floors above
  • Urban commercial and residential – These are buildings with three floors or higher, with commercial units (not necessarily street-facing) on the ground floor and residences above
  • Office and residential – This refers to properties with at least two residential units in an office building (or group of buildings)
  • Office convenience – These are office buildings with smaller retail units/services mostly catering to office workers
  • Live/workspace – A building with two units where a business owner lives in the residential part and works in the commercial part
  • Studio/light industrial – Mixed-use properties like this allow residents to run small workshops or studios in the same building
  • Hotel and residence – This refers to mixed-use properties that combine hotel space with upmarket multifamily residences (a good example is Four Seasons)
  • Neighborhood commercial – These are convenience stores and other such facilities that are allowed in residential areas
  • Retail district retrofit – Suburban retail locations that have been retrofitted to serve more uses
  • Parking/retail – These are parking structures with retail shops on the ground floor
  • Shopping mall conversions – When office and/or residential are added adjacent to existing standalone shopping malls
What types of mixed-use property loans in the market, & how do you qualify for them?

There are many types of mixed-use commercial real estate loans, from short-term private money loans to government-backed loans. Each type has different terms, qualification requirements, and interest rates. The most common type is a government-backed mortgage from either the USDA or SBA. Other loans include conventional mixed-use loans from traditional lenders and short-term loans aimed at commercial real estate investors.

Here’s a quick summary of what you can expect from each loan type:

Mixed-Use Property Loans Guidelines

Now let’s talk about some loan-specific information that is not included in the table above so you can get an even better sense of each type and decide which one best suits your requirements and circumstances.

Short-term Loans

These mixed-use property loans come in several varieties, including commercial bridge loans and hard money loans. Interest rates are higher because these loans also carry higher risks for the lender. Monthly payments are usually interest-only, but a balloon payment is repaid at the end. Investor-borrowers typically use these loans for:

  • Competing with all-cash buyers, as these loans have quicker application, approval, and financing time frames
  • Buying a mixed-use building immediately and then refinancing to a more affordable permanent loan later
  • Purchasing and renovating mixed-use buildings that are in poor condition

They are also used by borrowers who don’t meet the criteria set by traditional lenders for permanent mixed-use loans.

Commercial Mixed-Use Loans

These refer to standard loans from traditional banks and lending institutions that offer balance sheet loans and portfolio loans. Commercial mixed-use loan lenders typically require that the mixed-use property is in good condition to finance it. Unlike government-backed loans, they don’t require owners to occupy the building.

Minimum qualifications vary, too. Aside from the minimum credit score and debt service coverage ratio indicated in the table above, your business also generally needs to show cash reserves of at least six months, plus two or more years of stable operating history.

Government-Backed Loans

These include USDA Rural Development business loans, SBA 7(a), and SBA 504. To qualify, your business has to occupy at least 51% of the mixed-use property. Furthermore, SBA 504 loans may be used to finance construction and renovations.

SBA 7(a) loans are known for low down payment requirements and flexible underwriting guidelines. SBA 504 loans, on the other hand, are intended to encourage economic development within the borrower’s community. USDA loans are aimed at rural development.

Is a mixed-use property loan right for you?

Mixed-use loans are popular with both real estate investors and business owners. Investors buy mixed-use properties to become landlords to commercial and residential tenants. On the other hand, business owners purchase mixed-use buildings to operate their business out of the commercial space while living in the residential unit.

When you look at it from a risk and return perspective, a mixed-use commercial real estate asset makes a lot of sense. Commercial units (like ground-floor retail) usually fetch higher rents compared to apartments. And though such commercial units carry a bigger occupancy risk than residential units, the risk is mostly offset by residential units’ relative stability in the same building. All in all, the wide tenant variety lessens the overall risk for investors.

It’s also worth noting that mixed-use developments offer the unique benefit of having built-in clients/customers for commercial spaces. This can provide investors with multiple streams of income. What’s more, potential residential tenants are drawn to convenient and walkable communities, leading to higher rental demand.

How do you start applying for a mixed-use property loan?

Are you in search of multi-use financing and are not sure which solution is best for your purposes? Capital Investors Direct is one of the top commercial property loan specialists that can help you find the most suitable mixed-use property loan for your requirements. Use this website to get a quote or contact one of our consultants to begin the application process.

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