Avoid Mistakes, Get the Financing You Need to Acquire a Commercial Property
A commercial real estate mortgage is unlike other business loans, including residential property loans. Not only do the loan terms vary significantly, but the whole process is more complicated.
The length of payment, for example, varies by almost 20 years. A conventional residential home loan is payable for a period of 30 years, but a commercial loan typically has a 10-year payout because it is considered high risk.
When it comes to evaluation of whether or not a debtor has the capacity to pay the mortgage, loan providers look at a property’s ability to generate income instead of a property owner’s personal gross income.
With such differences, it is not a surprise that mistakes are made in securing a commercial real estate mortgage. If you can avoid committing the same blunders, you can breeze through the loan process. So what should you keep an eye out when acquiring a commercial real estate mortgage?
Common Mistakes to Avoid When Securing Financing
- Hiring a non-specialized lawyer
It is important that the lawyer you hire understands general business practices and the process of acquiring a loan for a commercial property. Agreements on this side of the real estate market can be lengthy and complicated, which someone inexperienced in the field can easily wreck. They could also overlook important matters that would not have escaped a lawyer specializing in commercial real estate.
- Failing to keep documentation organized
Applying for commercial property financing often requires a voluminous quantity of information, which lenders will review to help them analyze which application package to grant you. Imagine how they would react if you present them with disorganized supporting documents. Remember that lenders are often running against the clock on the approval process and disorganized paperwork will only cause major delays.
The least you can do is to arrange documents properly and accordingly to shorten the review process. Make sure to submit detailed information about the financial prospects of your business, how you plan to use and pay for the building, and other important property information. It is important that the report is produced by third-party processors.
- Having inadequate cash reserves
Remember that lenders are in the business of lending and getting back money owed, so they will look for details that guarantee the security of their interests, such as liquid assets, cash, and cash equivalents. If they find that you don’t have the strength to service the loan, your application for financing may be rejected. So make sure that you have at least six months’ worth of loan payments in your coffers before you apply for a mortgage.
If your loan application is for a multi-tenant property, you may also need to set aside the money needed to pay for the cost of replacing tenants that move out. You also need to prepare for a 20% down payment and a loan-to-value ratio of 80%. If the business climate is strong, however, you may only need to pay a downpayment of 10%.
- Using the wrong lender
Do you always get your business loan from a bank or your favorite lender? You might not be able to use either of them when applying for a commercial real estate mortgage. Lending on commercial properties is a different industry from general business lending, so check first if your bank or go-to lender can provide the financing you need. Otherwise, tap into alternative financing resources, such as the Wall Street conduit debt or life insurance companies.
Due to the complicated and complex nature of securing a commercial property mortgage, it is wise to choose a property wisely before you decide to pluck it off the market and apply for a loan. It is best to choose commercial properties that are capable of generating significant income-over-debt ratio so there’s no doubt in a lender’s mind that you can pay off the loan.
Check out property designs with income-generating features or an overall look that sells. You want every square inch of the property you choose to be worth something. Most importantly, tap into commercial real estate experts for advice to help you make a profitable decision.