Commercial Real Estate Financing

Financing a home or financing a commercial real estate project may differ in objective but are quite similar in real estate financing basics, the ABC’s of which are:

• A cooperative and competitive lender
• Loan worthiness (pre-approval)
• Lock-in of lowest prevailing interest rate

Obtaining the most advantageous loan terms: length of loan, no pre-pay penalties, etc.

Naturally, obtaining the most attractive loan means pledging the most attractive assets to the lender and there are myriad ways of accomplishing this. Among assets that would be of interest to the financier are:

• The property being financed
• Asset financing: capitalizing on company or personal assets
• Accounts receivable: usually acceptable if secured by contractual obligations and in sufficient amounts to secure the loan
• Inventory
• Fixed assets

Knowledge and planning are the key factors in evaluating needs prior to approaching the financing aspect of a commercial real estate venture. Knowledge is required to avoid the wrong type of financing, miscalculating the necessary funds needed, and/or underestimating borrowing costs.

Planning is required for successful management of the commercial real estate project funded.

Planning is essential prior to shopping for funding and negotiating with a prospective lender. Negotiating under pressure of time constraints or similar factors places the lender in a greater position of negotiating strength.

Regardless of the type of commercial real estate being financed, whether apartment buildings, strip shopping centers, duplexes/fourplexes, etc.:

Lenders (banks) will usually limit the loan to a maximum of 75% of the property’s appraised value.

If the financed property is already occupied, lenders will require proof of sufficient debt repayment ability according to a set ratio (1:20 x or higher).

Single tenant occupied commercial buildings may be subject to a review of the tenant’s stability and credit-worthiness.

With regard to apartment financing, lenders often require updated and annually reported rental income data.

Environmental audits may possibly be required of commercial units housing certain manufacturing processes.

Most importantly, these key factors must be taken into consideration when negotiating a commercial real estate financing transaction with a lender:

When secured by a first mortgage, what will the lender’s charges over prime be – 1% or more?

What percentage over prime will be charged on a property secured by a second mortgage?

Based on the type of facility financed, what kind of amortization schedule will be applied? An example would be a 25 year amortization with a seven year balloon.

Preliminary to any financial proposals is the property appraisal – finding the market value of the income producing property. Among the considerations are: If new, construction costs, land value, etc. If already in operation: depreciation, improvements, etc.

Comparing similar properties within an area, professional appraisers will use cost, sales comparison and income capitalization to estimate the property’s market value.

Obviously, these factors in commercial real estate financing are simply an overview of a complex and detailed process and even the most experienced of investors have not achieved success without the advice of professionals like attorneys, brokers, real estate agents, accountants, etc.