A commercial real estate loan generally is a unique type of financing available for income-producing, non-residential properties. This may include loans for the purchase or refinance of an apartment complex, an office building, a retail center, a self-storage building and various other commercial property types. If you have decided to apply for a commercial real estate loan, you may be wondering what you can expect from the loan process and what terms you should expect to receive. With a closer inspection of these loans, you can prepare yourself for the loan process.
How Commercial Loans Are Unique
If you are like most people who are eager to learn more about commercial real estate loans, your only experience with real estate financing up to this point may have been with residential loans. With a residential loan on a property that will be your primary residence, your personal financial documents are reviewed by the underwriter. The underwriter wants to ensure that you personally have enough income to support the mortgage payments and other property expenses without creating an excessive debt burden on you. With a commercial real estate property, the property generally is income-producing. Because of this, many commercial lenders will heavily analyze the income of the property, including its historical and projected income. Most require the property to fully support the debt of the new loan and other property-related expenses. Commercial lenders also want to ensure that you have the financial ability to supplement the property as needed if occupancy declines or serious repairs are needed. Therefore, most lenders will also review the borrower’s’ financial documentation, including your credit report, bank statements, paystubs and more. This means that a commercial loan is more heavily underwritten on both the property and the borrower’s’ financial strength.
Getting Your Personal Finances and Documentation in Order
Some lenders will ask for only moderate or minor information during the pre-qualification stage. Others will review as much information as you can provide up-front so that they can give you a more complete answer regarding if your loan request can be approved and what loan terms may be offered. At some point during the loan process, most lenders will need to see two to three year of your tax returns, including business and personal returns. They will also need to see at least three months of bank statements for all accounts, pay stubs, your personal credit report and other relevant financial documents. You can gather these items together now so that they are easily available upon request.
Creating a Portfolio on the Property
Because the underwriter will also base the final approval as well as commercial loan rates and terms on the strength of the property, the property’s financials are also required for pre-qualification and full underwriting of the loan request. If you are buying a property, ensure that you request three full years of operating statements as well as the current year-to-date information from the seller. A rent roll and leases are often also required. It is wise to gather this information together before you apply for the loan. You can carefully scrutinize the numbers yourself to ensure that this is a property that is a sound financial investment. If you currently own the property, the underwriter typically will use the historical income and expenses on your tax returns, but you will still need to provide a year-to-date statement, a rent roll and leases.
What to Expect When Shopping for a Commercial Real Estate Loan
Because the underwriting of a commercial real estate loan can be complex and is based on a wide range of factors, you can see that providing more information up-front can help you to generate a stronger pre-qualification. It is wise to create an initial loan summary request with pertinent information, such as your credit score, your net worth, your liquid assets, property operating data and more. You can send this summary to a wide range of lenders to determine their interest. Have a full loan package available with all information described above to send to those who seemingly have greater interest. Keep in mind that you should not have to pay to get a pre-qualification or to learn about commercial loan rates and fees. Shy away from brokers that require a fee for this service up-front.
How to Determine Which Loan Rates and Terms Are Desirable and Competitive
The commercial loan rates and terms that you receive on your loan request will play a major role in the financial status of the property. A higher loan payment can easily eat into your profits, so a lower payment is generally preferred. However, pay attention to the term length. Balloon loans are common in commercial real estate, but it can be difficult to time the sale of a commercial property. If you choose a balloon loan, always have a solid exit strategy in mind. In addition, pay attention to loan fees and costs. Some lenders charge costly fees, and these can directly erode away your profits.
What to Look For in Your Commercial Loan
When you apply for a commercial loan, you may run into some terms that you may not be familiar with through your residential loan experience. For example, some commercial loans have a prepayment penalty (unlike loans from Marlin Financial). This means that you cannot prepay the loan during the specified time period without incurring a penalty. This may include making larger monthly payments as well as selling the property or refinancing the loan. Recourse is another term you may not be familiar with. Many commercial loans are full recourse, regardless of whether you own the property in a partnership, corporation or another entity. Full recourse means that the lender can directly pursue your personal assets if you default on the loan. Non-recourse loans are difficult to find, but you may find partial recourse more easily. If you discover any loan terms that you are not familiar with, educate yourself fully before applying for the loan.
Setting Reasonable Expectations for the Commercial Loan Process
The commercial loan process can be lengthy, and some loan applicants may grow frustrated with how long it takes to close and fund the loan. Consider that an appraisal typically needs to be ordered on a property, and it may take two to three weeks or longer to complete this report. A property inspection may also be ordered, and this can create negotiations between a buyer and seller that could extend for days or even weeks. Other reports that may be required less commonly are a termite report, a seismic report, an environmental report and others. In some cases, the findings in these reports may create lender requirements for the property to be repaired or improved in some way before the loan can close. Some repairs may take several weeks to complete. Typically, the loan process and borrower will work closely while these reports are being completed to create a full loan package that can be submitted to underwriting. Altogether, you can reasonably expect a commercial loan to take 30 to 75 days or longer to complete, depending on the specifics of the loan request.
If you are thinking about investing in commercial real estate, applying for a commercial loan is typically part of the process. As you can see, there are critical differences between commercial and residential loans that you should be prepared for. By focusing your attention on these points, you can more easily choose the right loan for you and walk through the loan process with minimal stress.