Commercial real estate, and maybe you’ve already guessed, is real estate purposed for business to include rental income, office space, and retail spaces (as the most common). Commercial real estate loans exist in wide variety and it is worth while to find a quality navigator to help you find the right fit, the right type, and the right lender.
Generally, commercial real estate loans are made to businesses, trusts, and partnerships but in some instances commercial lending is made to private individuals with the express intent to develop investment properties for resale or long term passive income. Commercial real estate loans are asset focused with a lien helping to guaranty the creditors repayment.
What is a lien?
A lien is a legal right that the owner of a property gives to the creditor. If the owner can’t fulfill the debt obligation, the creditor might be able to assume ownership of the property or asset secured by the lien. When a lender makes a loan on a commercial property they assume the risk of default or devaluation, a lien helps the lender mitigate risk and offer reasonable terms.
It’s common practice that the lender will require a lien and normally a down payment. Most commercial lenders look for 10% down and specific loan to value ratios. Accurate valuation is the first critical step in securing your financing. Why? Commercial lenders consider the property first and the borrower second, after all it’s the property and the lien that guarantees the lenders repayment in the case of default.
Repayment Terms and Schedule
There are two general terms to know in the case of “long” term loans. Amortization and balloon payments. Typically a commercial real estate loan will carry an amortization period where principle and interest payments are due over a longer period with the remaining balance due at the end. Balloon commercial real estate loans are given for periods of 5, 7, and 10 years where the remaining balance due at the end of the schedule.
Not to worry
Most commercial lenders normally offer refinance loans and cash out refinance loans where equity in the property has increased over the course of the schedule. Known as a cash out refi, lenders allow for borrowing against the real value of the property allowing the original loan to be re-paid and cash taken out against the equity.
Interest rates and fees
Most commercial loans will carry rates that are higher than traditional mortgages and rates can vary based on the property type, location, and the loan to value (LTV) ratio. Debt Service Coverage Ratio (DSCR) has become a more popular metric in recent lending. This means the property or business produces enough cash flow to cover expenses and service the new debt.
Commercial real estate loans also carry additional fees the residential borrower may not be familiar with. Accredited lenders will normally require an independent appraisal, often a title search, survey and legal fees, and origination fees. Normal practice is for the lender to include these fees at closing, but sometimes require payment at application, especially at the point of appraisal and title search.
How to apply for a commercial real estate loan
Property value and financials matter. In cases of rent producing properties, lenders will require profit and loss statements for a set number of years, tax returns, income statements and rent roles, bank statements, and personal credit history for any associated borrowers, partners, or affiliates listed on the loan.
Other business properties, such as an owner occupied property, will require business financials similar to the above minus rent roles and profit and loss statements. The business may need to show 2 to 5 years of tax returns, be able to demonstrate adequate cash flow with bank statements, and corporate filings.
Why it’s important to seek consultation as you prepare to take on a commercial real estate loan.
Fees can add up quickly, you’d like to have a reasonable assumption that you’ll get approved before spending out of pocket to meet lenders needs. The right partnership can save you time and money in being well prepared and assisting in determining eligibility and the likelihood of an approval before you invest in application, legal, and processing fees.
The right partner will also have the right relationships to talk to lenders about your loan before you ever apply. It pays to know how specific lenders evaluate potential borrowers and properties and who would be most prepared to offer the best terms.
Its likely that running your business takes most of your time, outsourcing the lender search and comparing terms keeps you focused on what you do best. The process of selecting the right lender can be daunting, especially if you’ll start your search from scratch. Relying on the experience and network of a good partner saves you time.
When your ready to borrow we’re here. We will help you navigate the waters and get your loan request in front of the lender with the best terms, that specialize in your needs, and the lenders that are trending on your property and loan type. Contact our commercial loan consultants and get a free no obligation assessment.