Purchasing a Commercial Property?
Learn the Ins and Outs of Getting a Commercial Real Estate Loan
Whether you’re buying commercial real estate as an investment or for the use of your business, most of the time you’ll have to get a commercial real estate loan unless you have enough capital to cover the entire purchase price (and, most of the time, even if you have adequate capital to cover the purchase price, leveraging your purchase (i.e., getting a loan) is something you’ll always want to consider because it may be better to free up the capital you have on hand to do other deals).
Even in tough economic times, there are countless banks, brokers and services seeking to make commercial real estate loans. This makes for a very competitive environment so even though there is a significant burden on you, the potential borrower, to produce the appropriate documentation to successfully get the loan, the lender is also in it to make a return and therefore will oftentimes want to see the deal through rather than lose it to another competitor. It’s of course critical to know what you’ll need to provide even before you approach a lender about getting a commercial real estate loan.
The following will typically be required for you to get a commercial real estate loan:
Down Payment (or “equity” in the deal)
Although it does happen, it’s extremely rare for an individual or company to secure a commercial real estate loan without, as they say, some of their “own skin in the game.” The lender obviously wants to know you’re serious about holding onto the property and the best way for them to guarantee that is based on how much of your own money is riding on you paying the bank back. Don’t be surprised if you’re expected to put upwards of 35% down to secure a competitive loan.
Commercial real estate loans cost more (i.e., the interest rate is typically higher) than their residential counterparts. This is all of course to do with risk. When lenders are dealing with higher dollar amounts, with people or companies who are taking loans to make money off their property (as opposed to fulfilling a lifelong dream of home ownership), they charge higher interest rates. Just like a residential mortgage, when you buy commercial the lender wants to know that you’ll make good on your payments and what better way to determine your willingness to keep on top of your payments than to look into how you treat your existing (and past) debts.
Historical and Pro forma Operating Statements (investment property only)
You may decide you’re going to put 50% of the purchase price down on a property, you may have the best credit on earth, but at the end of the day if you’re acquiring an investment property and the property is not generating adequate income to cover the loan, there’s only so much a lender’s going to be willing to do. Now, it would be untrue to suggest that whenever you purchase an investment property the lender must see positive income in order to lend. That is an entirely oversimplified way to look at it, but it is fair to say that the lender wants to know how the property has performed from an income standpoint the past several years, and how the property can be expected to perform in the future. And depending on the property’s performance, the lender may want you to tell a better “story” as to how you’re going to get this property to operate better (i.e., produce more income).
Business Plan, Performance, Etc. (buying property for business use only)
When you have no intention of using a commercial property to generate income, you’re typically talking about using it as part of your business. When you try and secure a commercial real estate loan for a business, you’ll run into similar questions from the lender about the performance of the business you operate (or are buying) just as you would about the performance of the property you’re buying. The lender will want to know the net income of the business, they’ll want to know that you’re capable of running that type of business, they’ll want to know that there’s a history of generating the types of revenues and profits that will enable you, the borrower, to make your monthly loan payment.
This list is not meant to be exhaustive by any means. Each property comes with its own special nuances, which often dictate lenders asking for additional information for them to even consider making the loan. However, you should, at the least, plan on having the aforementioned information. Commercial real estate loans can take a bit longer to underwrite than the average residential loan so you should expect it to take anywhere from 30 days on the low end all the way up to (and sometimes beyond depending on the complexity of the deal) 90 days.
And remember, this isn’t the same as buying the home of your dreams. Getting a commercial real estate loan is a business decision. Treat it like one. Make sure the loan you get works for you. Don’t be shy about aggressively negotiating for the right deal for your situation. Even though getting commercial real estate financing may not be your expertise, you’re certainly aggressive in your other business dealings so treat this the same and make sure you walk away feeling like you earned the best deal possible.