Unlike borrowing against your
home, financing a commercial property can be a
confusing and frustrating experience. Borrowers
are often subject to unwieldy demands and requirements
imposed by traditional lenders, such as banks,
since these lenders are regulated and generally
averse to risk-taking.
Similar to other financial products and services
like credit cards
or insurance, many options exist for commercial
real estate buyers and owners to choose from.
Consumers should take the time to understand all
of the elements of a lender’s mortgage program
instead of simply focusing on interest rate.
Becoming well informed can save a borrower time
and money during the loan origination process
and in the future.
Having worked with thousands of small business
owners and property investors over the years,
we’ve studied how different types of lenders
operate and how they affect borrowers and their
ability to secure loans.
Here is a list of eight important questions
every prospective borrower should ask before selecting
a commercial
mortgage loan lender:
1. What is the maximum amount I can borrow?
You should first ask yourself: what are my capital
needs both now and in the future? The majority
of borrowers would actually prefer to pay a slightly
higher interest rate in order to maximize the
amount of money they can borrow. More cash on
hand means more capital to invest in your business
or additional real estate.
Typically, commercial lenders will loan up to
75 to 80 percent of the property value, requiring
the borrower to come up with a 20 to 25 percent
down payment. On a $500,000 property -- that totals
as much as $125,000 down. However, programs do
exist that allow you to borrow in excess of 80
percent of the property value. If maximizing cash
is your primary goal, then paying a higher monthly
payment may be a small price for the added capital
a higher loan-to-value (LTV) ratio provides.
Additionally, you should also ask your lender
if their program allows you to take out a 2nd
lien mortgage, either at closing or in the future.
Choosing a lender that allows 2nd liens will add
flexibility in meeting your future capital needs,
and will allow you to capitalize on your property
appreciation without a costly refinance.
2. Is there a balloon payment?
While balloons may be a useful option for residential
borrowers looking to lower their rate, it is a
requirement of most commercial loan programs for customers
to pay off their mortgage early, generally in
3 to 10 years. A balloon loan will force you to
go through the entire loan process again before
the balloon date. This means spending thousands
of dollars in closing costs, and risking a higher
cost loan if interest rates have risen. Even worse,
if you are in the midst of difficult times in
your business or have vacancies in your property,
you run the risk of not qualifying for a loan
renewal with your lender. Therefore, programs
that do not require balloons are superior to those
that do.
3. How soon will I have a solid commitment,
and how soon can I close?
If you are shopping for a property and need to
be pre-qualified for financing, or if you are
looking to close quickly, make sure you get a
clear picture of your lender’s timeframes.
Unlike residential mortgages, traditional commercial
lenders often must review your historical income
statements, asset statements and other documentation
before giving you the thumbs up on your loan application.
It can take weeks before you learn whether or
not the lender wants to take you on as a customer.
And then, even after your loan is approved, you
still run the risk of being turned down by a bank’s
“credit committee.” This bureaucratic
process results in quite a bit of stress, uncertainty,
misinformation and delays that may ultimately
cost you a final loan approval. Make sure your
lender provides you with clear and accurate information
on approval and closing timeframes.
4. Will I have to maintain minimum assets
or deposits?
If you are looking to a bank for your commercial
loan, ask your loan officer if you will be required
to hold a minimum level of deposits at the bank
in order to qualify for the loan. Deposit requirements
can tie up funds and be a hindrance if you need
future access to that cash.
5. What are the documentation requirements?
As many traditional lenders sometimes require
endless amounts of documentation, it is important
to ask upfront about the amount and the types
of financial documents that are required. Locating
and providing copies of leases, operating statements,
tax returns, asset statements and other financial
documents can be quite challenging and time consuming.
Furthermore, many small businesses do not have
the level of documentation necessary to support
their income in order to qualify for a bank loan.
Such businesses are usually best served by alternative
lenders.
6. How much financial reporting is required,
and what financial covenants must I make?
Beware. When obtaining a commercial loan, many
borrowers are not fully aware of all the future
obligations imposed by the lender, beyond simply
making the monthly payment. First, many lenders
will require you to provide quarterly or semi-annual
financial and operating statements on your business
or property for as long as you are in your loan.
While continuing to provide these documents can
be more than just a simple nuisance for small
businesses, even scarier is the imposition of
financial “covenants,” which are guarantees
you must make in the loan agreement about the
continued financial strength of your business.
If you don’t think this is important, consider
the
fact that certain covenants couldput you in default
on your loan if you lose a tenant or experience
a tough business period, even if you are current
on your monthly payments!
Be certain to ask your lender about reporting
requirements and financial covenants. If the risk
is not acceptable to you, find another lender.
7. Is the loan assumable?
Unlike residential mortgages, it is standard for
commercial mortgages to charge prepayment penalties
for early repayment of a loan. If you think there
is a chance you may be selling the property at
some point in the future, ask your lender if the
loan is assumable by your property buyer. Assumable
loans allow a buyer to take over the mortgage
terms and loan payments. It is also an excellent
selling point that can enhance the marketability
of your property when you list it for sale.
8. What are the total costs associated
with getting the loan?
A little research upfront about the costs associated
with the loan can potentially
save you thousands of dollars. Be sure
to ask about all costs you will be responsible
for, including lender fees and points, property
survey, environmental reports, and any legal fees
that might be associated with the loan. Some lenders
will have less expensive alternatives, or will
bear these costs altogether.
When shopping for a commercial mortgage loan,
remember that there are vast differences between
lender programs. Different loan programs should
not simply be compared based on the interest rate.
It is also important to remember that banks are
not the only lending institutions out there. Many
alternative lending solutions, such as Commercial
Loan Lenders, provide customers with a simplified
and flexible lending process, without the distraction
of a bank’s rigorous requirements. Asking
the questions outlined above can save you time,
money, and a big headache down the road.
CLICK
HERE to Apply for a Commercial
Mortgage Loan, with No Obligation!
About the Author:
Brett Evenson is Managing Director of Commercial
Direct ®, a division of Bayview Financial
Small Business Funding L.L.C.
|
APPLY
NOW 