Monthly Archives: February 2017

Commercial Real Estate Loan

Commercial real estate loan rates make up a small percentage of the whole when it comes to acquiring affordable business loans, ones that are designed to educate and accommodate prospective borrowers. In order to attain a value balance on both sides of the equation, a number of other factors will enter the fold, such as finding a suitable broker and having a commercial portfolio that is worth the examination. Much like the proceedings entailed in various home loans, prospective investors and owners should know how it all comes together on a basic level before submitting any information. Although commercial real estate loan rates may end up being a decisive factor in the final decision making process, getting a heads-up on the existing rules and requisites may help prospective borrowers know exactly what they’re getting into.

Dealing with mortgage loans of any kind requires a bit more than having a little patience. With small business loans in particular, the size and structural aspect of each property in question will play a role in overall loan amounts; rental properties such as smaller apartment buildings designed to house five units minimum will likely differ from mortgage loans involving larger parcels of land. Commercial real estate loan rates can often times fluctuate, thus effecting cash flow, or the lack thereof, which will usually determine how the loan contract is drawn up. All in all, these are just a few things to consider before diving into the belly of the borrowing process.

Another aspect of securing funds for a potentially successful property acquisition is the unsecured business loans portion, and how credit-worthiness can make or break a number of business loans transactions. Sometimes collateral is used to secure the loan in question, as opposed to the applicant’s good-standing reputation via solid credit status. Commercial real estate loan rates for unsecured business loans are also based on having very few or no credit blemishes at all, which is something that conventional investment lenders in general will look at closely before approving this type of capital venture.

Trusted conventional commercial lenders and brokers alike are well-schooled when it comes to small business loans and scanning each individual application, which is why it makes good sense to prepare a portfolio that has all the requirements contained within. The same principle applies to home loans when using the conventional method, however, commercial real estate loan rates will vary.

Business loans, however, contain some of the standard stipulations, such as proven income via bank statements and tax records over the previous two years. In a world where a handshake and promise will no longer suffice, having these items in place can increase the chances of being approved for these types of mortgage loans. For those whose credit lines are far from perfect, consulting with a reputable broker who deals with commercial hard money may be the only other option. By comparison, the commercial real estate loan rates via the hard money method will definitely be 5 – 7 percentage points higher.

Regardless of the case, securing business loans is a process that is tailored for both borrowers and lenders to not only show indications of a viable financial solution, but to profit from on each transaction. From strip malls to industrial complexes, the amount of money to be made from these mortgage loans usually depends upon how much is invested at the onset; smaller investments can often be lucrative enough to reinvest in bigger projects down the road. Commercial real estate loan rates, by that time, may become less relevant than originally anticipated.

Commercial Real Estate Loans

Commercial real estate loans are based on a number of contributing factors for both borrowers and lenders alike. With a short list of set-in-stone prerequisites already in place for business loan applicants, no standardized format exists for those who seek interim financial investment backing. In order to bring both sides into the arena while standing on common ground, a mortgage broker will likely play an integral role by linking the type of loan requested to a suitable lending entity, yet there’s a little more to it than that. With so many different types of commercial real estate loans and lenders available, the following information may provide a crash-course education on the latest lending trends and practices.

From small business loan rates to purchasing larger lots of land, employing the use of a business loan calculator is an absolute must, which can be found on most every realty-based website. By performing a simple search query on how to find the lowest mortgage interest rates, pages and pages of results will appear. What this essentially means is that the competition factor is high and the borrower has a vast number of choices. As a result, mortgage rates are often lower on a variety of commercial real estate loans.

Commercial property is categorized or defined as a place or places of business that include apartment buildings (minimum five units), office buildings, strip malls, industrial complexes, storage facilities, and the list continues. Acquiring a business loan for any of the above starts with contacting a reputable mortgage broker, in which case the specifics will be explained in greater detail. The basic requirements for landing the best possible small business loan rates include having a solid business plan and portfolio, as well as a recent financial history covering the previous two years.

Some commercial real estate loans will involve other financial aspects, which of course depends upon circumstance. Hard money lending differs from conventional borrowing in terms of duration and how the funding will be secured. It’s important for prospective borrowers to know the difference because the mortgage rates are much higher when it comes to hard money and what can actually be used as collateral in cases of default. This is one of the reasons why having a trusted broker is crucial to finalizing whichever transaction is on the table.

While the rules and regulations will always be there concerning commercial real estate loans, the two-way-street principle applies. Working with the right financial organization does involve doing a little research, such as how long they’ve been in business, whether or not they cater specifically to small businesses, and how big or small their operation is. The too big to fail companies may offer great small business loan rates, yet the personal aspects of customer care may be lacking. Because the choices abound, finding a brick-and-mortar lender may require thinning the herd via the process of elimination. A business loan of this nature is attainable, yet perhaps far and few between when it comes to commercial real estate loans on the whole.

It’s also important to obtain as much information as possible on a handful of commercial brokers. Some will have their own interests at heart while others will bend over backwards to find the best mortgage rates for each and every client. Being a good judge of character and following gut instincts can also make a difference in the vetting process. The main objective here is to have the bases covered before venturing into any business loan, no matter how large or small. When commercial real estate loans work as they’re intended to, the sky’s the limit.

Commercial Real Estate Loans

This article describes 12 recurring problems with commercial real estate loans that commercial borrowers and their advisors need to anticipate before it is too late. The following problems are common in traditional bank commercial real estate loans and should be avoided if feasible (special circumstances will periodically make some of these terms unavoidable).

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 1: Tax Returns versus Stated Income

Most traditional banks will require several years of tax returns in order to qualify for a commercial real estate loan. The alternative is to use a Stated Income lender that does not verify personal income or assets. Many borrowers will simply not qualify for a commercial mortgage loan if tax returns are used due to high business expenses (and low net income). Many lenders using tax returns will also continue to verify income after the loan closes. Stated Income lenders will not engage in this practice.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 2: Special Purpose Properties

It is becoming increasingly difficult to get commercial loans for special purpose properties. Properties that do not fall in the categories of apartments or retail/office buildings are often placed in this special purpose classification. This means that business acquisition loans for commercial properties such as restaurants/bars and auto service businesses are frequently hard to find. Commercial financing will be even more difficult to locate for such specialized properties as churches, funeral homes, nursing homes and assisted living facilities.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 3: Recall/balloon features

These terms are used by many banks to effectively shorten most commercial real estate loans to 3-7 years.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 4: Short-term loans (less than fifteen years)

15-40 year commercial property loans without recall/balloon features are available.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 5: Up-front Commitment fees

Under most circumstances, commercial borrowers should not pay such a fee. Please note that processing/retainer fees are not included in this discussion of commitment fees. Processing/retainer fees should be viewed as an acceptable and standard business practice when dealing with commercial real estate loans.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 6: Business Plans

Under most circumstances, commercial borrowers should not use a lender that requires a business plan.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 7: Cross-collateralization

Commercial borrowers should not be required to use their personal assets as collateral for a commercial property loan.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 8: Sourcing and seasoning assets. Seasoning of ownership.

This particular problem will not be relevant to all business borrowers. However, if it is relevant, you should seek out a lender without sourcing and seasoning requirements or limitations. Most banks have strict guidelines for sourcing and seasoning of assets or ownership to qualify for commercial real estate loans. For a purchase, commercial lenders will frequently want documentation about where the down payment is coming from (sourcing). Commercial lenders will also frequently have very specific requirements stipulating that the funds must have been in a specific account for a specific period of time, often 3-6 months or longer (seasoning). Seasoning of ownership is similar to seasoning of funds, except this requirement involves the minimum time someone has owned a commercial property before they can refinance the property.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 9: Requirement to sign IRS Form 4506

IRS Form 4506 authorizes the lender to obtain a borrower’s tax returns directly from the IRS. This form is routinely required by most traditional banks and many other commercial lenders for a business acquisition loan. Commercial borrowers using a Stated Income lender with limited documentation requirements will avoid this requirement.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 10: Debt Service Coverage Ratio (DSCR) in excess of 1.2 for a business acquisition loan

The most flexible approach to DSCR for a commercial property loan will require a DSCR in the range of 1 to 1.2, with exceptions permitting a DSCR less than 1.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 11: Minimum commercial property loan size that is too high for your commercial mortgage needs.

It is not unusual to encounter a minimum commercial real estate loan requirement of $500,000 to $1,000,000.

COMMERCIAL REAL ESTATE LOANS PROBLEM NUMBER 12: Excessive length of the commercial real estate loan process

Many traditional banks require three to nine months to close a commercial mortgage. A more action-oriented commercial lender will close commercial real estate loans in 45 to 60 days.

Small Business Real Estate Financing

I had a lot of great questions come in over the past week that covered topics such as construction loan interest calculations, multifamily financing, hotel financing, and private money lenders. The one that was the most interesting concerned small business real estate financing.

Buying real estate for your small business offers you, as the business owner, several advantages over leasing. The first advantage is that financing the real estate purchase helps small businesses grow into larger businesses by preserving capital during expansion. Growing a business is a cash management balancing act and the less money buried in facilities means more money for other necessary functions.

The second advantage is tax related. Funds to support the business can be diverted to help your personal portfolio by building equity in the commercial real estate housing the business. The lease payment that benefited your former landlord is now helping you reduce current business income from a tax standpoint, yet keeping it in your pocket through your real estate. Many owners take the property in their personal names and have the business pay rent to them rent to cover the property’s operating expenses. Some even have additional tenants to supplement the cash flow.

The third advantage relates potentially to your estate. If the property is in personal name and the business is unwound, sold, or terminated for any reason, that asset is not part of the business transaction. This can simplify an otherwise complex situation.

There are two types of small business real estate loans. One is guaranteed by the Small Business Administration (SBA), the other we’ll call “conventional.” Both offer a business owner a loan amount up to 90% of the purchase price of the property used for the business. The government guaranteed financing tends to have a somewhat lower rate, but requires a great deal more paperwork. Conventional financing is the more flexible by offering different documentation requirements and potentially faster funding.

Conventional Small Business Real Estate Financing

In recent years, some lenders have created SBA “look-alike” or conventional programs that have fewer restrictions than SBA-guaranteed financing. For example, they allow the owner-user to occupy less space in the property than the 51% required by the SBA, allow for reduced or “E-Z” documentation (no tax returns), and don’t require additional collateral such as a primary residence. Depending upon the type property that is being financed, conventional small business real estate loans may allow as much as 90% loan-to-value (LTV) financing, although some special purpose property types, such as hotels, restaurants, and gas stations are limited to lower LTVs. Construction to permanent loans are also available on a conventional basis, allowing a business owner to custom design a property for the needs of the business.

The Small Business Administration

The Small Business Administration is a quasi-governmental agency established to assist small business owners obtain financing for their business operations. The primary form of collateral for SBA loan is owner-user business real estate. SBA funds can be used for a variety of purposes including the acquisition of business real estate, business property, operating capital and any other legitimate business purpose.

SBA loans are typically used for single-use or single-tenant properties where the owner of the property is the owner of the business using the property. The SBA’s rule of thumb is that 51% of the property must be used by the owner-operator to qualify for the agency’s guarantee. There are often other restrictions placed upon the owner to obtain this financing such as: Annual reporting and cross-collateralization with the owner’s primary residence. The SBA finances office buildings, retail centers, automotive centers, warehouses, light industrial (manufacturing) facilities and a host of other property types.

Most federally regulated financial institutions offer some form of SBA guaranteed financing. It’s too profitable for them to pass up. Unfortunately, not all of them are good at it.

Realistically, you should be in business at least two full profitable years and have another three to five years of history working in that business if you business if new. You’ll need to show a lender how the new property will benefit your business through projections and in particular, the SBA is always concerned with how many new employees you are likely to hire. In the final analysis, there is a wider range of financing options for the small business owner today than ever before. If the opportunity presents itself to you, small business real estate usually makes sense for both the business and to the owner as a personal wealth building tool.