Commercial Property Loans-Basic Overview

by Lim

Like residential property loans, or home mortgage loans, commercial property loans are here to help people, mainly businesses or people who wish to own/ buy a commercial property. Such loans allow businesses to purchase lands, buildings or other properties without putting too much strain on their finances. And, like a home mortgage, a commercial property loan uses the property bought as collateral against the loan.

However, unlike the pre-approvals that one might obtain for a home mortgage, most approvals for commercial property loans, or commercial mortgages, are based on the property you're interested in buying, as well as the company's or business' credit history and business plan. Usually, a sound business plan plus a good credit background will ensure better chance for approval. The loan to value ratio, the amount of the loan as a percentage of the total value of the property, also determines the estimate rate the borrower will need to pay.

Basically, there are 2 types of commercial property loans- fixed rates and adjustable rates.

Applying for a Loan
These are the documents the borrower needs to prepare:
Detailed financial reports, including balance sheets, tax documents, and sales records, to show the overall health of your business, detailed analysis of the costs and income you expect the new property to generate, costs of building out the new facility, staffing, and insurance, as well as contingency plans (back-up).

Transaction
For a commercial property loan, the potential borrower is asked to pay 1-2% of the terms of the loan (standby points) to show commitment to the deal. The amount is refundable once the loan is closed. A commitment letter is also presented (by the lender) with the terms included. The terms will include the following:

• Closing conditions
• Owner occupancy requirements
• Affirmative & negative covenants regarding what the borrower agree or disagree to do
• Representation and warranties

The closing process will follow once both parties have come to a mutual agreement. Issues such as tenants, leases, environmental reports and zoning ordinances will be factored into the process, which might take up to 2-3 months in certain cases.

How to Land a Good Property Loan?
Choose the right property
When buying a new property for your business, location is essential. Your real estate agent should help you evaluate foot and vehicle traffic, zoning regulations, and previous uses of the property.

The commercial property loan you get will often be dependent on numerous factors about the property itself, including passing an environmental inspection and meeting fire safety codes. You may need to work with a fire alarm vendor to upgrade sprinklers and smoke detectors.

Choose the right source for your loan
Working with a reputable mortgage broker or lender is essential to getting the right commercial property loan. Look for lenders who have been in business for years, with proven successful businesses as references. Mortgage brokers can be harder to judge since they generally don't hold onto loans for long, but again, references are the key.

The best lenders will help you with the first two steps on this list, as well. Look for a lender who can give you some advice on what to look for in a property, and who can guide you through the process of gathering information and applying for your commercial property loan.

The key to commercial real estate financing is to find a lender that will meet the needs of the business, and then allow the business to grow. The right business can increase the value of the real estate it occupies, but only under an agreement that allows it to move forward.