When trying to finance commercial property, it's best to know your options before you approach a bank or lending institution for money. Careful consideration of everything involved can mean the difference between getting the loan, or watching your efforts get wasted.
Financing commercial property is not the same as financing residential property. Financing residential property is pretty simple and straightforward. Commercial loans exist in a world of their own. The similarities are that the property must be properly valued, and the property owner must be able to repay the loan. Large organizations have the capacity to structure their debt in ways that are unavailable to the smaller property owner. The smaller owner is the focus here.
A relationship with a bank will be an enormous asset in acquiring a loan on a prospective commercial site. When economic times are difficult, your bank will probably throw you under the bus as quickly as one with which you have no relationship. Under normal circumstances however, a longstanding history with a financial institution should offer the prospective commercial property owner some advantages that might not be otherwise available. This would include more personalized service and more attractive rates. Beyond this, the business of banks is to make loans. Shopping for the right bank is essential. Some are hungrier than others. Smaller local institutions shouldn’t be discounted. They are more intimately familiar with the unique aspects of their environment and could offer some advantages in rates and service that larger national institutions may be unwilling or incapable of providing.
Items that will be considered are the financial health of the prospective owner and the value of the property for which a loan is being sought. Other factors that will be analyzed relative to the property being financed will be as follows: projected gross income such as rents, operating expenses including taxes, maintenance, utilities, insurance premiums and other items that are common to the type of property being financed. These factors will add up to a debt repayment ratio. These ratios vary from one institution to another. They will also vary with the state of the economy at the time and the forecast of economic conditions in the near future. If the property owner cannot meet the ratio established by the bank, the likelihood is that the loan will not be granted.
Interest rates on commercial property can be daunting. The rates will probably be substantially higher than residential mortgages. Residential mortgages are granted subject to a stable work history and an acceptable income. Granting of the commercial loan is tied to the income that the property is projected to generate. This is a riskier proposition and the property owner bears the brunt of this risk in higher rates.
The term of these loans can be short by comparison to residential mortgages. Although the payments may be similar to a long-term loan, there could be a balloon payment when the loan matures. The options will then be to liquidate the property and pay the bank, use company assets to pay the balance, or refinance the commercial property and start anew. Many times the refinancing of the loan will require the same level of closing costs that were required in securing the loan the first time. This will include a title search, financial statements, and an examination of the repayment ratio. There are times where an extension of the existing loan will be offered, but this is not without some costs, such as appraisal fees, loan generation fees, taxes and a number of other tedious nuisances.
How to Meet Your New Neighbors for the First Time
Getting to know your neighbors is a great way to make new friends and increase the feeling of community where you live. Find out the best way to reach out to your neighbors.
Picking the Right Accessories for a Day on the Links
Clubs, irons and golf balls aren't the only considerations you need to bring before you golf! Find out what else you need.
Surprising Tips for Commercial Real Estate Investors
Investing in commercial real estate can have great rewards, but with great rewards comes great risk if you're not prepared. Understand your options before you take any leaps of faith.
