$8,500,000 Mixed-Use (Retail + Apartments) in Santa Monica, CA

The Deal

Our borrower approached Commercial Lending Solutions seeking $8,500,000 in permanent financing for a mixed-use property in Santa Monica, California. The asset featured ground-floor retail space occupied by an established restaurant with five years remaining on their lease, plus 12 residential units on the upper floors. With their existing bank loan maturing within 90 days, the borrower needed to execute quickly while securing favorable long-term financing terms.

The property generated strong cash flow from both income streams, benefiting from Santa Monica's desirable Westside location and consistently low vacancy rates. However, the dual-income nature of the asset would prove to complicate the underwriting process significantly.

The Challenge

Mixed-use properties present unique underwriting challenges that many lenders struggle to navigate effectively. The fundamental issue lies in evaluating two distinct income streams with different risk profiles, lease structures, and market dynamics under one financing package.

The retail component, while generating substantial income, carried the perceived higher risk typical of restaurant operations. Several lenders we approached wanted to exclude the retail income entirely from their debt service calculations, effectively underwriting the deal as a pure multifamily property. This conservative approach would have resulted in a significantly lower loan amount, forcing the borrower to bring additional capital to closing or accept unfavorable terms.

Additionally, the restaurant's five-year lease term created concerns among some lenders about future tenant rollover risk, despite the tenant's strong operating history and the location's proven appeal to retail operators. The timing pressure from the maturing loan limited our ability to pursue a lengthy capital markets execution that might have yielded better terms.

We encountered three distinct lender responses: complete avoidance of mixed-use deals, conservative underwriting that ignored retail income, or aggressive pricing that reflected excessive risk premiums. None of these approaches served our client's financing objectives.

The Solution

Rather than accepting suboptimal terms from lenders uncomfortable with mixed-use assets, we targeted regional banks with strong local market knowledge and experience underwriting similar properties. Our strategy focused on lenders who understood Santa Monica's unique market dynamics and could properly value both income components.

We identified a regional bank with significant multifamily and retail lending experience in the Los Angeles market. Crucially, this lender recognized Santa Monica's exceptionally low vacancy rates for both asset classes and viewed the location as a significant credit enhancement rather than focusing solely on potential risks.

Our presentation emphasized several key points: the restaurant tenant's operational stability and sales performance, Santa Monica's restrictive zoning environment that limits new supply, the property's prime location benefits for both residential and retail uses, and comparable mixed-use transactions that supported our valuation thesis.

The selected lender performed comprehensive due diligence on both income streams, analyzing residential rent rolls against local multifamily comps while also evaluating retail sales data and foot traffic patterns. This thorough approach allowed them to underwrite the full property income rather than applying arbitrary haircuts or exclusions.

The Outcome

We successfully closed the $8,500,000 permanent loan at 70% loan-to-value with a five-year fixed rate and 25-year amortization schedule. The regional bank's sophisticated underwriting approach resulted in proceeds that reflected the property's true value, incorporating income from both the residential units and retail space.

The financing structure provided the borrower with long-term rate certainty while maintaining reasonable leverage. The 25-year amortization schedule optimized cash flow while the five-year term aligns with typical hold periods for this property type.

Most importantly, the lender's willingness to properly value the mixed-use nature of the asset saved our client approximately $1,200,000 in additional equity that would have been required under the more conservative approaches offered by other institutions. The transaction closed within 45 days, providing adequate time before the existing loan maturity.

This transaction reinforced the importance of proper lender selection for specialized property types. While mixed-use assets require more sophisticated underwriting, the right lending partner can deliver financing terms that reflect the property's full income-generating potential rather than penalizing owners for diversified cash flow streams.

Trevor Damyan is Managing Director at Commercial Lending Solutions in Los Angeles, specializing in complex commercial real estate financing transactions across all property types.