Financing Condos in a Mixed Use Building

As if condo buyers didn’t have enough headaches trying to buy a condo with the new FHA rules in place, many are also running into troubles with “mixed use” buildings, i.e., condos that have residential units but also commercial space (usually on the ground floor or street level), as is common in urban areas like ours.

Examples of this commercial space may be a grocery store or restaurant on the bottom floor of the building or a convenience store as part of the lobby…all of which is very convenient, however, may create difficulties for obtaining the loan you want.  Under current Fannie Mae and Freddie Mac guidelines, financing becomes an issue if the commercial space is more than 20% of the entire project.  If it’s more than 25%, you cannot do an FHA or VA loan either.

After finding what seemed to be the perfect condo for one of our buyer clients in Alexandria, it was disappointing to learn a Whole Foods occupied 43,000 square feet (28.6%) of the building, taking some popular financing options off the table for our buyer.

Ilyce Glink  has this to say on the new financing rules for condo buyers:

Developers who built multi-use properties, with commercial, retail or restaurants on the first floor and condo units above may find that their properties will not be approved for financing.

Fannie Mae guidelines require that no more than 20 percent of a building’s floor area ratio (FAR) can be commercial. So if the building has 3,000 square feet, with a 1,000 square foot shop on the first floor and two 1,000 square foot condos above it, the property will likely not be “approved” and a buyer will not be able to get financing.

All this is bad news for condo buyers. Buyers who didn’t close before the end of 2009 may now find themselves rejected for financing if they are buying in a condo building that has not been approved or can’t be approved. Can you imagine the headaches this will cause?

Lenders say that buyers who need a loan to close on their purchase should ask whether a building is approved for financing before bothering to go for a showing.

She continues…

While there are some waivers being granted, condo buyers all over the country will find it more difficult to finance their purchases. These days, if you can’t finance a property, the number of prospective buyers will decline, and the property value could tumble.

What does this mean for buyers?   Expect headaches, long waits, bigger down payments and higher interest rates if you’re buying a condo in a mixed use building that has too much commercial space–assuming you can get financing at all! And if you’re thinking of putting an offer in, it’s wise to do some legwork on the building and with your lender before you go through the effort.

This is all thanks to the “tightening” of the credit markets that’s been going on since the bubble burst.  Will some of these rules loosen in the future?  I hope so.  Otherwise, current owners in buildings with high percentages of commercial space need to be prepared to wait it out.

This information deemed reliable but not guaranteed.  Every situation is different and you should check with your agent and a lender about specific properties.

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