owning commercial real estate
understanding loans for future commercial developments
Understanding loans and risks
ANEW YEAR BRINGS NEW GOALS FOR BUSINESS OWNERS AND INVESTORS. Many share the goal of acquiring, constructing or refinancing commercial real estate (CRE). Despite the rate increase by the Federal Government in December, rates still remain at low historical levels, which make it a smart financial decision to obtain financing.
There are several financing vehicles, including insurance companies, pension funds, private investors and other capital sources. Though there are numerous lending options, two are most commonly utilized: conventional and SBA.
conventional bank loans
Conventional commercial real estate loans are applicable to both owneroccupied or investor properties. “Owneroccupied”is defined as the borrower’s business occupying 51 percent or more of the building square footage.
u.s. small business administration (sba) loans
Only owner-occupied buildings qualify for SBA loans, ¬not investor properties. SBA loans are not actually made by the SBA; rather, lenders make commercial loans that adhere to the SBA’s guidelines, and in turn, the SBA guarantees a portion of that loan. This eliminates some of the risk to the third-party lender. This SBA guarantee allows lenders to provide financing with longer terms and better rates, as well as the option to put less money down.
There are two real estate loan options offered by the SBA: the 7(a) and 504. The 7(a) is SBA’s most common loan program, but speak to your lender to discern which better fits your objectives. It’s important to note that only certain lenders are part of the SBA’s Preferred Lenders Program (PLP). This is part of SBA's effort to streamline procedures and delegates the final credit decision (and most servicing) to carefully selected PLP lenders.
lending risks
A few inherent real estate lending risks a lender can face are repayment risks; which can be the main risk to most lenders, completion risk, borrower/individual guarantor risk and re-leasing/rollover risk. Other risks to lookout for are market risk, and competitive position risk.
topics lenders should explain
Understanding what type of loan you’re getting is crucial; so don’t hesitate to ask your lender to explain questions you might have. If you’re not sure what to look for, a few things to ask could be, loan-to-value ratio, debt service coverage ratio, interest rates and fees, personal guarantees and prepayment terms.
what to prepare for your lender
Things to prepare to get your loan moving faster are your personal financial statements, leases, and resumes for principals and business overview. Three years are preferred for business profit and loss statements, most recent business interim statement and personal and business federal income tax returns. Owning commercial real estate can be your biggest and best financial goal for 2017, seeking a lender’s advice and assistance can help make that dream possible.