When you apply for any type of loan you will need to know the requirements of it according to the lending policy of the lenders, whether it is private lender or a government bank. Applying for a commercial real estate property on the other hand requires much more than any average loans such as personal loans, student loans or any other.
Moreover, the amount involved in commercial real estate loans is huge and therefore the lenders need to be extra cautious wile lending out the money. The lenders need to consider a lot of things to make sure that they will get back the loaned amount along with the interest.
There are lots of reasons for purchasing commercial property and the lenders consider this aspect as well to determine the feasibility and prospects of loaning. A commercial property owner may utilize the space for several reasons such as:
- Setting up a new facility
- A single store
- Offering spaces for monthly rent to several offices
- Setting up a warehouse or even for
- Expanding an existing one.
All these will depend on the type, location and nature of the space but all of it requires a lot of commitment from the side of the owner to repay the commercial real estate loan taken out. There are several different SBA or Small Business Administration programs that guarantee and offer commercial real estate loans. A commercial real estate loan may seem much similar to a residential mortgage in many different aspects. However, your access to such kind of loan will depend on several factors that may vary according to the loan type and its sources such as a standard bank or any private online sources such as https://www.libertylending.com/ or others.
Things the lenders look for
The lenders look for different things for different types of commercial real estate loans to find out the eligibility of the borrower as well as the ability to repay the loan along with interest as per the predetermined rate and time.
Ideally, lenders have three specific sets of requirements for each type of commercial real estate loan before granting it to you. Whether it is a small business or for a large organization these requirements relate to the following categories.
- Your business finances
- Your personal credit and
- The characteristics of the property that you want to purchases.
Generally speaking, a commercial real estate loan will require a lot more scrutiny as compared to any residential mortgages. This is because businesses especially the smaller ones are far riskier. It is for this reason most small businesses usually do not succeed in getting a commercial real estate loan or any other for that matter. The banks and commercial lenders will take a look at the following to make sure that you are suitable for the loan:
- Your books of accounts to verify whether or not your business has the required cash flow to repay the loan
- Calculate the Debt Service Coverage Ratio of your business by comparing the Annual Net Operating Income when divided by the annual total debt service and this ratio should be typically 1.25 or greater to meet the requirement
- The lender will also look at the credit score of your business to determine your access to the loan, the terms, the interest rate, down payment requirement as well as the payback period.
Ideally, the minimum requirement for FICO SBSS credit score is around 140 for an SBA loan pre-screening. However, there can be a lot of exceptions for this in both the directions.
In addition to the above the lender may also look at the structure of your business as well as the liability aspect of it. This is because the loan requirement and amount offered will vary if your business has limited liability and is in the form of an LLC, S, LP, or C corporation.
Most interestingly, a commercial real estate loan granted to sole proprietorship firm will be treated as a personal loan rather than commercial loan and will also have your personal wealth attached to it as collateral security for the loan thereby increasing the risk of losing it as well in case you default.
- As for your personal finances for small companies that has a single owner or a few partners the banks and commercial lenders will check the personal credit score and history of you as well as your partners, if any. If there is any entry of a financial issue in the past such as foreclosures, defaults, court judgment or foreclosures then it will affect the chances of loan approval in a negative manner.
- As for the characteristics of the property, the banks and lenders look for several other specific factors primarily because the property itself will act as collateral for the loan. The lender will actually attach a lien to the said property. This will allow them to seize it in case you fail to repay the loan on time.
The requirements that the lenders look for are:
- Your ownership as well as the space occupied by your business in the said property which should be at least 51% of the building
- The property value in case you take the loan from hard money lenders who care for it more than the creditworthiness of the borrowers
- Whether the property is a storefront, a commercial building, a warehouse or a lab because no single family residence will qualify for a commercial real estate loan.
However, a multi-family property may qualify for such a loan provided you run your business from it and your business occupy at least 51% of space of the property.
If the property does not follow within any of these categories, you may instead apply for an investment property loan as that will be an appropriate investment for rental properties.
All lenders will usually let you borrow the maximum LTV or Loan To Value ratio. This ratio can be anywhere from 65% to 75% of the property value. This means you will have to arrange for the deficit amount for the down payment.