Commercial Real Estate Loans

How To Get a Commercial Real Estate Loan

How do you get a commercial real estate loan? The truth of the matter is, when it comes to buying commercial real estate most people, even those with excellent resources, are not able to pay for commercial property out of their own pocket. We want to outline some basics regarding how to get a commercial real estate loan so you can begin to figure out how to proceed with landing commercial real estate property.

There are 3 things we want you to be aware of when securing a loan on commercial real estate.

How To Get A Commercial Real Estate Loan—A Good Down Payment

The real deal is—a lender is going to want to see money before they lend you anything. For commercial real estate in most cases, you will be required to put at least 10% and possibly up to 30% of the loan price down.

How To Get A Commercial Real Estate Loan—Excellent Credit

We want you to be aware of the fact that if you have bad credit you should try to get it straightened out before applying for a commercial real estate loan. You can find out your FICO score from your lender. We also want you to be aware that commercial real estate loans typically cost a considerable amount more than the average home loan. A good rule of thumb is that a score of 700 indicates EXCELLENT credit.

How To Get A Commercial Real Estate Loan—Experience

Lenders tend to play hard ball. They are more hesitant to lend for commercial real estate because of the risks involved. The lender is going to be looking at your experience. If you do not have experience, it is not going to add credibility. If you do have experience in commercial real estate, your reputation is going to speak volumes to the lender.

What About A Bank Loan?

The usual way investors secure a loan is typically by starting the loan process by contacting their bank. Banks can be a hassle. In addition to taking forever, banks have the most stringent requirements and impose tons of loan covenants.

What we want you to be familiar with is that bank loans go through several phases of review. First, they will look at your historical income statements, and statements of cash flow from previous commercial properties. Then they will review 5 years of tax returns on you and all the owners who will guarantee the loan.

It can take several weeks before you can get a commitment on the loan from the bank. Even if you do get the commitment, the bank committee may later veto the loan.

Private Lenders

Let’s be honest. If you know that your statements are not provable and solid, or you do not have a high credit score, applying at banks is generally a waste of time. Your best bet is to go directly to a private lender.

The most expedient way to get pre-qualified quickly is to contact a private lender. Once you secure a commitment from a private lender, you can begin a parallel process with your bank. Some private lenders will give you an oral commitment in a few days. Make sure you are going through a commercial real estate lender rather than a residential one.

The thing to remember is what kind of parameters on the terms are you willing to accept. How about a covenant or condition on the loan? Will you take a balloon loan?

What About Covenants and Conditions

The thing to keep in mind about covenants and conditions is that simply making regular monthly payments on time is not going to cut it. Much more money may be required. Many lenders ask you to provide quarterly or annual income statements, balance sheets and tax returns. Some lenders will require covenants (ie. promises that your business will meet certain criteria in the future). They may want to see a certain positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria. This means that during a downturn in your industry or the economy, your business may face temporary cash flow or profit deficiencies.

If your business falls short of the terms and conditions contained in the loan covenants, your loan may enter into default. Default always brings all sorts of penalties. This usually means paying back the loan immediately. You may have to find another lender ASAP or face foreclosure on the property.

Documentation

Keep in mind that many investors do not have the level of income documentation some lenders require. Remember, the documentation required and the timelines for approval work hand-in-hand. The more information required, the slower the loan approval and funding process. Most traditional and non-traditional lenders require 3-5 years of financial statements, income tax returns, and other documentation. Other documentation may include:

Personal financial records
Leases
Asset statements
Original corporate documents