A Guide to Commercial Real Estate Financing Options

Commercial and residential loans differ in a number of key ways, primarily in their purpose, underwriting criteria, repayment terms, and risk assessment. 

• Purpose: Residential loans are designed for individuals or families who plan to live in the home. Commercial loans, on the other hand, are for businesses and investors who intend to use the property for income-generating purposes such as offices, retail spaces, rental units, or other business operations. 
• Underwriting Criteria: Residential loans typically consider the borrower's personal income, credit score, and debt-to-income ratio. In contrast, commercial loans focus more on the potential profitability of the property, its cash flow, and the borrower's business financials. 
• Repayment Terms: Residential loans usually have longer repayment terms, often up to 30 years, with fixed or adjustable interest rates. Commercial loans generally have shorter terms, usually around 5 to 20 years, and often include balloon payments at the end of the term. 
• Risk Assessment: Commercial loans are often seen as higher risk compared to residential loans. This is due to the potential volatility of the business market, the reliance on the property's income, and typically larger loan amounts. As a result, interest rates for commercial loans may be higher, and a substantial down payment is often required. 

In conclusion, while both types of loans offer ways to finance property, the terms, qualifications, and purpose of the loans vary greatly based on whether they're for residential or commercial use. It's important for borrowers to understand these differences when seeking financing for a property. 

Commercial Real Estate Financing Options 

• Traditional Commercial Loans: These are loans offered by banks and other traditional financial institutions for the purchase of commercial properties. They typically require a strong credit history, significant down payment (often 20-30% of the property's value), and proof of a steady income. The terms can range from 5 to 20 years, and interest rates may be fixed or variable. 
• SBA Loans: The Small Business Administration (SBA) offers several loan programs designed to help small businesses acquire, construct, or renovate commercial property. The most popular are the 7(a) and 504 loan programs. These loans often have lower down payments and more favorable terms than traditional commercial loans because a portion of the loan is guaranteed by the federal government. 
• Bridge Loans: These are short-term loans used to "bridge" the gap between the need for immediate cash and the future availability of funds. In real estate, bridge loans are typically used to finance the purchase of a new property before selling an existing one. They usually have high-interest rates and are generally expected to be repaid within a year. 
• Hard Money Loans: These are short-term, high-interest loans provided by private lenders. The loan is primarily based on the value of the property serving as collateral rather than the borrower's creditworthiness. Hard money loans can be obtained quickly, making them a good option for investors who need to move fast. 
• Line of Credit: A commercial line of credit provides a business with access to funds up to a predetermined limit. It's flexible and can be used for a variety of business purposes, including managing cash flow, purchasing inventory, or handling unexpected expenses. Unlike a traditional loan, interest is only paid on the amount of money actually used. 
• Term Loans: A term loan is a lump sum loan that is paid back with regular repayments over a set period of time, or term. These are often used for significant investments in the business, such as buying expensive equipment or real estate. Terms and interest rates can vary widely based on the lender, borrower's credit history, and the purpose of the loan. 
• Real Estate Investment Trusts (REITs): While not a loan, REITs offer another way to finance commercial real estate. REITs are companies that own, operate, and/or finance income-generating real estate. They let individual investors purchase shares in commercial real estate portfolios that generate income from a variety of properties. Investing in a REIT can provide access to income-producing real estate without having to buy, manage, or finance properties directly. 

Factors Lenders will Consider for Loans 

• Income: This refers to the borrower's ability to repay the loan. For individual borrowers, lenders will look at personal income from jobs, investments, and other sources. For businesses, lenders consider the income or revenue generated by the business. A steady and sufficient income is crucial as it assures the lender that the borrower has the means to repay the loan. 
• Credit: Credit refers to the borrower's credit history and credit score. Lenders use this to evaluate a borrower's creditworthiness, or their likelihood to repay the loan based on their past behavior. A good credit score and a history of responsible credit use can make a borrower more attractive to lenders. 
• Loan-to-Value Ratio (LTV): This is a metric used in lending to represent the amount of the loan compared to the value of the property that will secure the loan. It's expressed as a percentage. A lower LTV means the borrower has more equity in the property, which is less risky for the lender. Most lenders require an LTV of 80% or lower, meaning the borrower must provide at least 20% of the property's value as a down payment. 
• Debt-Service-Coverage-Ratio (DSCR): This is a measure of a business's ability to cover its debt payments with its current income. It's calculated by dividing the business's net operating income by its total debt service (the total amount of its loan repayments). A DSCR of greater than 1 indicates that the business generates sufficient income to cover its debts, which is favorable to lenders. A DSCR of less than 1 could indicate potential difficulties in repaying the loan. 

How to Get a Commercial Real Estate Loan 

Securing a commercial real estate loan can be a complex process, but with the guidance of Millennium Properties, the process can be much smoother. Here's a general step-by-step guide on how to obtain a commercial real estate loan: 

• Assess Your Needs: We start by working with you to clearly identify why you need a commercial real estate loan. Your objectives, whether it's purchasing a new property, refinancing an existing one, or renovating your space, will help us determine the right type of loan for your situation. 
• Compile Your Financial Documents: We assist you in gathering all the necessary financial documents. These include your personal financial records, business financial statements, tax returns, and specific details about your property. We provide guidance on what documents are needed and how to effectively present them. 
• Evaluate Lenders: With our extensive network and deep understanding of the financial market, we help identify the most suitable lenders based on your specific requirements. We take into consideration various factors such as interest rates, repayment terms, and down payment requirements to find the best fit for you. 
• Apply for the Loan: Once we've identified the right lender and loan type, we move to the application process. We assist you throughout this process, ensuring that all requirements are met and that your financial case is presented in the best possible light. 
• Approval Process: After the application is submitted, the lender will review and evaluate it. This process may involve a credit check and a possible appraisal of the property. We are there to manage your expectations during this period and facilitate any additional requests from the lender. 
• Close on the Loan: If your application is approved and you're comfortable with the terms, we will move towards closing the deal. We guide you through this final stage, helping you understand any associated fees, ensuring all paperwork is accurately completed, and initiating the repayment process. 

At Millennium Properties, we are with you throughout the entire loan process. Our expertise in commercial real estate and lending practices streamlines the loan acquisition process, ensuring that you secure a loan that aligns best with your business goals and needs. Contact us to get started today!