WRITTEN BY DAVID REED
Conventional loans underwritten to Fannie Mae or Freddie Mac guidelines are an option as long as the loan amount meets conventional limits. There are a few things that are different about financing a mixed-use unit but one of the more important is how much space is dedicated to commercial and how much to residential. Remember, Fannie and Freddie primarily buy residential loans and leave commercial financing to others. That said, there is a limit on how much space can be dedicated to commercial. These guidelines require that no more than 25% of the livable space be dedicated to commercial. For instance, if the building is say 15,000 square feet of livable space, then commercial occupancy is limited to 25% of 15,000, or 3,750 square feet. These loans also ask the borrowers both occupy the building as a primary residence and own and operate the business or businesses located in the building.
FHA loans can also be an option. As with any government-backed loan, FHA also requires the borrowers to occupy the property. But FHA allows for more space to be labeled as commercial. Up to 49% of the livable area can be commercial. Note, the square footage assessment does not apply to parking garages or similar areas.
In addition, the property must also be approved much like any other with a property appraisal. This can sometimes be an issue if the building is rather unique to the area and there are no other mixed-use buildings nearby. It can be the lender’s call to make sure there are recent sales of similar properties in the area and how far away they can be, but in general, if the only comparable sales are miles away, conventional and FHA financing might be out of the question.
In this instance, it’s time for a commercial loan. Local banks are the primary resource for a commercial loan and underwrite the project a bit differently. With a commercial loan, the income generated from the building can be used for qualifying purposes and the buyers aren’t required to live in the property. A common commercial loan might be an adjustable rate loan with a balloon payment at say seven or ten years down the road at which point the loan must be refinanced or otherwise retired.