Commercial property loans are usually beneficial to businesses as they will enable them to expand, increase the earning potential and open up new locations. There are certain considerations you need to look out for when searching for a commercial real estate loan.
- The total relocation costs
Though securing the real estate loan is crucial for relocating your business, there are also other costs you need to consider. For instance, if you intend to open a new restaurant, the commercial kitchen will have to be stocked with the necessary appliances and equipment outfit.
So, it is crucial to ensure that your operating and opening costs are outlined in your business plan as you present it to the bank.
- Examine the financial records and credit score
Ensure that you keep a high credit score and organize the financial records before trying to secure a commercial real estate loan. You will need to sought out pending financial historical issues like a decline in business revenue or bankruptcy and remove any negative marks that your credit scores may have prior to applying for a loan. It will be easier to get commercial loans when you are aware of the existing financial situation.
- Carefully analyze the proposed location
As you explain the place you will be situating your business, the lender will evaluate whether it is a viable place. For example, if you intend to acquire a storefront for your retail business, the bank will check whether it can attract enough foot traffic and its visibility from the street.
If the property you intend to set up your business in a place that once hosted a business that later failed, take care to avoid falling into the same pitfalls. You will also examine to see if there are any upgrades or maintenance issues you need to impose on the building.
- Don’t choose a bank simply because it is big
A community bank is a preferably good place to seek a commercial real-estate loan. When it comes to commitment towards stimulating the local economy, community financial institutions usually do a good job. They usually examine the whole picture to know their customers before giving the loans to the applicants which most big banks fail to check.
- The bank should have an excellent customer service
Whether you have been running your business for 10 or 2 years, you will be taking a risk relying on your bank to get the necessary finance to buy the commercial real estate. To get all your concerns addressed and questions answered, you will have to find a bank that provides excellent customer service.
Other factors Loan specific factors to consider
There are some other factors you ought to be aware of when trying to get a loan. The Other factors you ought to consider when selecting a commercial loan are;
Just like other kinds of loans, you will also need to select between a variable and a fixed interest rate when it comes to a commercial loan. If you are confident that you have the capability to service the loan even when the interest rate significantly increases, a variable rate will be suitable. But if you are not sure of the certainty of repayments, you will be in a better position to manage the cash flows when you select a fixed rate. The market spread is usually used to determine the interest rates of a fixed rate commercial loan type.
Secured vs. unsecured
Depending on the benefits, you intend to gain from a particular loan, you can either choose an unsecured or a secured loan facility.
Secured: you will have to provide an asset, like a particular property, to act as the collateral that can enable you to gain the loan. Thus, in case you fail to repay the loaned amount, the lender will take the asset and sell it to recover the amount. But, the beneficiary will enjoy a lower interest rate than the unsecured one.
Unsecured: you will not need to provide an asset to the loan provider to get the loan. However, this benefit comes with a higher interest rate. In addition, many providers are reluctant to approve such kinds of loans due to their risk.
Loan to values
It is the ratio of the loan amount to the collateral property value. The most common loan to values rate, especially found in improved properties, is 75 to 85% but you can find the 40 to 70% range in non-income producing or special purpose properties. When targeting a commercial loan range that is towards the upper end, the borrowing company’s financial strength should be taken into account. In certain situations, other financing options like mezzanine loans can come on board to bridge the existing funding gaps.
Debt coverage ratio
As a requisite from most lenders, the debt-service coverage ratio is usually utilized to gauge a commercial loan. It is the net cash flow of the underlying property relative to its fixed debt service. For instance, you can find 1.30x for self-storage, 1.40x for hotels, 1.20x for multifamily, manufactured home communities, industrial, retail, and office properties.
Therefore, the owners and occupying tenants’ financial strength and the commercial loan lender will determine whether the actual ratio of the commercial loan is lower or higher.
Save for the standard carveouts like environmental contamination and fraud, there is usually the non-recourse to the owner’s property in a commercial loan. A partial guaranty on a particular commercial property loan is allowable on a client who possesses a relatively low owner-occupied property loan-to-value. However, the property’s principal owners/sponsors will have to provide full guarantees to the commercial lender in all situations to get the commercial loan.
As a standard provision for certain kind of loans like the commercial mortgage loan that has a fixed rate, there is the inclusion of prepayment penalties and limitations. Defeasance requirements like a capital market loan accompanying the commercial mortgage loan is an additional limitation to the lockout period. A yield-maintenance formula may be utilized to account for the actual prepayment penalties which in certain situations can equal a certain loan’s principal balance percentage.
To wrap it up
Provided that the commercial loan has been in place for some time, maybe more than 2 years, some commercial loan lenders allow qualified third parties to pay a fee so as to assume those commercial loans. However, businesses, developers, and commercial property investors need to check whether their ultimate lenders allow for this kind of flexibility option in their commercial property loan package.
When you want to shop for a commercial real estate loan from any finance provider that offers such a facility, you will need to keenly look into the above considerations so as to smoothly get the commercial loan that is suitable for your business.