Commercial loans provide investors and business owners with the capital they need to acquire, refinance, construction, develop, and renovate a property whether it is an owner-occupied business or for investment. Commercial loans can also be corporate and business structured loans or lines of credit.
Lenders tailor loans for different types of investors. Mezzanine or bridge loans, for instance, are suited for investors looking for short-term financing while a traditional mortgage is most appropriate for a long-term buy and hold investment strategies.
An investor seeking to refinance has to meet a set of requirements before getting approval. Factors such as credit score, credit history, and debt service coverage ratio, cash flow, borrower experience, and capital contributions are all considered.
Each financial institution has there own specific requirements for applicants depending on their loan programs. Besides increasing the chances for a loan approval, meeting the established requirements can help a borrower land favorable refinancing terms. Before an investor starts shopping for a commercial loan, he or she should know how to get the best terms.
Choose the Right Lender
This is the most important tip! Approach the right lender for the type of loan you are seeking. Not all lenders are the same. Some have specialty loans and some don’t. Some will be more flexible on certain property types or business types then others. Some may even prefer to only lend to local property and business owners. Know your lender before submitting a funding request.
Pick the Right Type of Loan
A commercial real estate investor should first understand the various loan options available and what they offer before applying for one. The mortgage terms of a loan differ widely, depending on the product. Bridge loans, for example, have a maximum limit of 80-90% of the LTV (Loan to Value) meaning there is only a minimum down payment of 10-20%. Some loans may start out as temporary financing vehicle then automatically convert into long term permanent financing.
A commercial mezzanine, bridge loan, hard money loan, requires a borrower to pay 9-15% interest. A borrower must be clear with the lender regarding the loan they are seeking. The wrong type of loan can leave an investor stuck with poor terms that are hard to meet. It is important to seek prime interest rate loans regardless of your situation. Don’t just think you have to settle for a temporary solution.
A business owner should clearly define the parameters of the loan such as the maximum loan limits, the duration, and type of commercial property before making a final decision.
Use of Funds
It is important to present a business plan or executive summary along with your resume when submitting a loan request. In the business plan or executive summary it is imperative that you clearly describe what the funds will be used for and how they are necessary. Don’t be general, be very specific so they know you have thought the loan through and you have a plan in place.
If you don’t know where your going, you are going no where! The business plan/proforma, resume, and a 2-5 year projection shows the lender you are a professional, you are definitely organized, and you are coming to them with a clear objective. This is your first impression and you must step forward with your absolute best.
Financial institutions will have different credit score minimums for various types of products. There is literally a loan program for every different type of situation regardless of where you find yourself. However a borrower with a higher credit score will be offered the financial institutions best rates and terms.
In instances where an investor or business has not either attained sufficient credit or has negative or delinquent accounts, it is advisable to work on boosting the rating through a credit repair company before approaching a financial institution for a loan. We can provide you a refer if needed.
Recourse or Non Recourse Loans
A recourse loan is one in which a lender is able to collect from a borrower or borrower’s assets in case of a loan default. A non recourse loan is when the lender does not have any recourse other than foreclosing on the property or any other collateral placed to originate the loan.
One should be prudent and always seek a non recourse loan so the lender is unable to go after you personally and all your assets to meet your debt obligation. Depending on the loan, property type, amount, and borrower non recourse loans are available.
Loans can range considerable from as little as 3 months to 50 years. It is important to search for the best loan term depending on your project. It is important to know the difference between a fully amortized or a balloon loan.
A fully amortized loan mean that every payment made includes a portion of interest and principle until at the end of the loan you are left with a zero balance.
A Balloon payment is when at the end of your loan term the principles was not completely paid down and you are therefore required to pay a lump sum. Choose the one that is best for your project or business.
Location…. Location…… Location……
The location of a commercial real estate is critical when searching for funding. This aspect determines the type of tenants, the occupancy turnover rate, and growth potential. It is why properties in metropolitan areas are more valuable than those in rural regions. This factor will influence how a lender calculates loan rates. A lender’s risk is reduced when properties are in prime locations.
For rental properties, the amount a tenant is paying, type of tenants, and turnover rate are elements that lenders may possibly consider. A piece of real estate that is occupied by more conservative long-term tenants is more promising to a financial institution however each property is unique and there is a solution for all.
Long term tenants can strengthen a funding request especially if they are anchor tenants with a strong financial position and credit history. When a lending agency is assured of a consistent income stream, it is easier to work out favorable terms.
Condition of the Property
A commercial building that needs significant renovations will require the borrower to spend money, which can drain cash flow. For the best rates, an investor should ensure that a property is worth investing in. Even if renovations are necessary, they should contribute towards increasing your ROI (Return on Investment). Many loan programs have a renovation disbursement so you can complete repairs and stabilize the property so you can increase occupancy.
The tenants that a property has had in the past, and the rate of turnover since its existence, are fundamental to a lender. When a commercial property has a low occupancy it may be a red flag to the financial institution. Then again this is a great value add to acquire a property with low occupancy, renovate, add amenities, and increase marketing efforts all to increase occupancy and even rents. When rents are increased and occupancy levels have risen, the property is now stabilized with a higher NOI (Net Operating Income) which translates to a higher value property.
If your acquiring a property, it is important to complete all your inspections making sure there are no hidden surprises. Environmental issues can be costly and take hiring an environmental company to perform tests. There are different phases or remediation which have to be inspected by the governing authorities and can be costly. If you have an environmental issue make sure you know all the steps including time and cost to evaluate if this is a property you should consider moving forward in purchasing.
Financial institutions offer various discounts and incentives for green buildings, which an investor can leverage for better terms. The use of renewable energy, sustainable materials, and eco-friendly building practices can earn a commercial property green building status and certification and better loan terms.
Free Energy Efficiency Consultation
We offer a free energy consultation for any business to help lower your monthly energy consumption and also the rate you are being charged.
Working with the right commercial lender is a invaluable when seeking out commercial mortgages and business loans. Experience makes all the difference to underwrite your loan request to obtain an approval.
Contact us today. We don’t provide denials only approvals, providing you the capital funding you need. Call us today to have a free consultation.