A Concise Guide to Applying for Commercial Real Estate
You’ve probably heard about how grueling it is to be approved for a commercial real estate loan. The truth is, as long as you understand your business needs and the options available to you, the loan process is similar to that of applying for a residential loan – with a few exceptions.
The commercial loan application process generally takes longer and has a more complex paper trail. That’s because these loans present a higher risk to the lender.
Another difference lies in the loan structure. While the norm for residential mortgages is 30 years, commercial loans carry shorter terms and don’t allow for prepayment, which would deprive the lender of compensation at their end. Commercial real estate loans also carry a higher interest rate than residential mortgages.
Finally, “lender” is more broadly defined when it comes to commercial loans. While conventional banks do make commercial real estate loans to investors, bridge loans may come from private entities as well. Other sources of funding for commercial loans are government agencies like the U.S. Small Business Administration and the nonprofit sector.
Determining the Right Lender
Because there are more options available for commercial real estate loans, you need to do more than go to your local bank when seeking funding. Be prepared to perform due diligence, researching a variety of options and loan structures before you even enter the prequalification phase. Some questions to ask yourself:
• Do I need bridge or mezzanine funding?
• Am I seeking joint venture capital?
• Do I qualify for a 504 or other small business loan?
• Will I have to provide personal assets as collateral on the loan?
Commercial real estate loans require a lower loan-to-value (LTV) ratio than residential mortgage loans, typically 75 percent or less. That means you will need to come up with more money upfront and may need to pursue alternative lending options to cover any shortfall.
Finding the Right Property
Unlike residential home lenders, who are primarily concerned about whether you can afford the mortgage payments, regardless of the property’s condition, commercial lenders have their eye on future cash flow. Problems with the property spell negative cash flow and could derail the loan process.
The lender also regards the property as collateral on the loan and will frown on things that limit the property’s value, such as use-specific zone laws.
Navigating the Underwriting Phase
Established businesses will need to provide three years of tax documentation in addition to all relevant financial records going back as far as 15 years in some cases. The lender may also wish to see a business plan with projected cash flow from the investment.
However impressive your plans are, the lender is still going to need to see a proven track record of making loan payments similar to those you are requesting. If you are just starting the business, they will examine your personal credit history and may want to use personal property as further collateral on the loan.
Prequalification, or the process of vetting your ability to pay, can take months, which is one reason businesses end up needing the immediate solution of alternative funding.
With unparalleled access to a variety of financing structures and low rates, Peak Finance offers creative solutions to help investors meet the capital requirements of virtually any commercial investment opportunity. The company works with seasoned investors as well as individuals whose circumstances do not conform to conventional underwriting guidelines, offering conventional debt financing, joint venture equity, structured debt products, construction financing, mezzanine, preferred equity, and bridge financing for a variety of commercial assets.