There’s no “HELOC” equivalent for commercial real estate. Here’s how to access equity instead.
A Home Equity Line of Credit (“HELOC”) is one of the most popular financial products available for homeowners who have built up equity in their house. It’s a convenient alternative to a full refinance of the house - instead of pulling cash out and paying interest on the full amount, homeowners only pay interest on the portion of the credit line they draw on.

Unfortunately, HELOCs do not exist for commercial properties. There’s really no commercial real estate equivalent to the HELOC.

That doesn’t mean there’s no way to access your equity for a commercial property, though.

But first, why this financial product, which I suppose would be called a CPELOC (Commercial Property Equity Line of Credit) if it did exist, isn’t a reality.

### Why HELOCs don’t exist for Commercial Real Estate

The first thing to understand is that commercial financing, in general, is structurally different from residential financing. In the residential mortgage market, the home owner typically takes out a loan for a 15 year or 30 year term, and equity slowly builds during that period. The underwriting revolves around the borrower’s personal credit.

In commercial real estate, while the borrower’s financial picture is a relevant data point, underwriting really revolves around the property. Loans are usually not such long-term fixed arrangements as are residential mortgages. The market for commercial real estate investment is also not as liquid as residential real estate in many cases, nor are most loans government-backed. It’s a different risk assessment than giving a consumer capital against their home equity, and would make it hard for the lender to deal with a default.

### Strategies for accessing equity for commercial investment properties

There are several methods of accessing pent-up equity in a commercial real estate investment property that has an existing loan. Here are some of the most common methods.

#### Mezzanine debt

[**Mezzanine debt**](https://www.stacksource.com/blog/when-the-capital-stack-gets-mezzy), often referred to as “mezz”, is a common type of subordinated debt. It is a higher risk loan than a typical senior commercial mortgage, as the senior loan has the right to be paid back first.

Mezz loans have higher interest rates and more covenants than conventional commercial loans. However, borrowers often look at the blended cost of capital when considering this type of subordinate debt, or compare the cost of mezz to the expected return of their equity. If the all-in cost of the mezz is lower than the expected return on equity, that’s still positive leverage.

In order to take a mezzanine loan on a property, it must be allowed by the senior lender through an intercreditor agreement. This is uncommon for local banks and credit unions to allow, and becomes more common with larger deal sizes and sophisticated sponsors.

#### Preferred Equity

Preferred equity, often referred to as “pref”, is similar to mezzanine loans in that it is capital that sits between the senior loan and the sponsor’s common equity. However, preferred equity is not structured as a loan and does not require an intercreditor agreement with the senior lender.

Preferred equity is commonly structured with a current pay component called a Preferred Return, where the Preferred Equity investor gets paid the first 8% or 10% return on equity, and then takes a smaller percentage of the Promote, which is the split of the rest of the equity returns. The Preferred Return may also be Accrued rather than Current Pay, particularly for construction or major renovation projects with limited short term cash flows.

#### Loans against GP/LP Equity

Individual investors in cash-flowing properties can also take out a minority loan against their equity interest directly in certain cases.

There are niche capital providers for commercial real estate investors focused on this type of liquidity, regardless of whether the investor is a General Partner (“GP) or Limited Partner (“LP) in a given deal. This does not affect the senior lender on your property, or other investors with equity in the deal. They simply lend against your ownership stake and collect interest payments from your capital distributions in order to give you more liquidity today.

While convenient, this is most often not the cheapest option for accessing equity compared to other methods of financing.

#### Cross-collateralized loans

Another route to utilize the equity built up in a commercial property, though not necessarily to withdraw it, is to cross-collateralize.

If an investor needs capital for another property acquisition or project of some kind, a cross-collateralized loan will issue a lien against the property that has equity built up in order to supply capital to the new deal. The underwriting for this type of financing can become complex, and usually starts with an analysis of the borrower’s [**Schedule of Real Estate Owned**](https://www.stacksource.com/blog/schedule-of-real-estate-owned) to determine potential assets to cross-collateralize.

#### Cash-out refinancing/Recapitalization

These last two strategies differ from above. They do not preserve the senior loan on the property.

The first is to refinance the senior loan on the property to take cash out. If the new loan has a higher net loan amount than the old senior loan, the difference is returned to the borrower.

#### Sell the property

Selling the entire property is the final, ultimate way to access equity in a property. While other methods of recapturing capital preserve ownership, they also only access a *portion* of the capital that is owned. Selling is (usually) the only way to retrieve the *entire* equity portion of the capital stack.
[{"id": "j24x851", "text": "Was about to come in this thread and criticize your post because of the existence of Mezz/Pref. then I started reading, lol. \n\nOne addition I'd have is that Lines of Credit do sort of exist. They are quite common for senior cross-collateralized loans (also referenced in your post), but some lenders will do a line of credit for sub-debt as well - effectively mirroring a HELOC.\n\nThis is incredibly common for assets like Hotels, where an owner might need some quick funds to carry out a PIP. Your best bet for something like this is going to be a local/regional bank.", "replies": [{"id": "j257vp6", "text": "Will add. Working for a bank and doing CRE loans at one time for Private Wealth clients we would do LOC secured by CRE all the time. And it would function as a true LOC and often no unused fee, etc but the whole point was we had their wealth AUM in house so would just do credit with lose structure to keep the AUM.\n\nSo either I\u2019d look at them as the source of repayment but also could do the underlying real estate. The issue that plays out is the term and needing to get reappraised/environmental, etc. \n\nAlso working with institutional borrowers we would do unecumbered asset pools (UAPs) which is a LOC but covenants will be tied to underlying performance of portfolio, DSC, LTV, FCC, TNW, etc.", "replies": [], "depth": 2}], "depth": 1}, {"id": "j25lf9k", "text": "I\u2019ll be honest, I skimmed most of this but Lines of Credits do exist for commercial properties. As a commercial lender, I do them quite a bit on single properties or multiple properties combined. Still only go to 80% LTV but they are IO for funds drawn just like HELOCs. I need to have the 1st lien in order to do a 2nd which is different from most HELOC lenders that can do 2nd and even 3rd liens even without the 1st but outside of that, not much else is different from a HELOC to a LOC secured by commercial RE.", "replies": [{"id": "j28zhd6", "text": "What kind of rates and terms are being offered currently?\n\nI spoke to my banker and they offer a 7yr, 15-yr amortized at 6% with 1point. \n\nThis is on a 2-property portfolio combined.", "replies": [{"id": "j2dc8g0", "text": "For HELOCs? At my FI we only do 2 or 3 year revolving HELOCs (we do renewals after the term) and rates are up around 7.50-8% with where PRIME has gone this year.", "replies": [], "depth": 3}], "depth": 2}, {"id": "j2ciyc2", "text": "Will be purchasing a NOO home at auction this month, can you do first lien HELOCS without season on a paid off hone?", "replies": [{"id": "j2dc446", "text": "At my FI, we don\u2019t have a seasoning period on the commercial side as long as the property is in good shape and ready to be occupied. We normally like to also at least see it already rented out and get the lease but that\u2019s a case by case situation.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "j26atu4", "text": "You absolutely can get a line of credit (LOC) on commercial properties with a DSCR lender.", "replies": [], "depth": 1}, {"id": "j26efzo", "text": "Yeah no you can get lines of credit on commercial property.", "replies": [{"id": "j279wh7", "text": "Yup, I have done it before multiple times. My bank has the first on almost everything I own so they will actually even just lend to me without even having to record a second mortgage.", "replies": [], "depth": 2}], "depth": 1}, {"id": "j26x3za", "text": "Literally just a cash out refinance. Done", "replies": [], "depth": 1}, {"id": "j28raf8", "text": "I've recently taken a cash out refi on a business and as part of the discussions, I wanted to structure it as ~60/40 cash out/LOC. The lender was more than willing to provide a business line of credit to be accessed at will during the period of the balloon.\n\nUltimately, I just maxed out the cash out, even though it was more than I wanted, as I didn't like the terms on the LOC. It was preferable for me to max the refi, and then just sit on the cash for a while.", "replies": [], "depth": 1}, {"id": "j29e364", "text": "I think this is also industry specific.  I'm in no way extremely knowledgeable on the commercial debt side,  but I currently have a $50k line if credit on my insurance agency that I've had for several years.  It's essentially available to most people in my franchise.", "replies": [], "depth": 1}]