As a business owner, one of the most challenging decisions you will face is whether to lease or buy the space in which you operate your business. Owning your commercial space can become a very valuable asset over time, and if managed properly,can ensure your company longevity.
Understanding the basic details of commercial real estate loans can have a significant impact on your bottom line, and indeed the future security of your business.
HOW DOES A COMMERCIAL REAL ESTATE LOAN WORK?
As with a home mortgage, a commercial property is used as collateral to secure the loan against default, withthelender placing alien on the property. Alien is the legal right for the lender to seize the commercial property in the event that the borrower doesn’t make their loan repayments.
Lenders will generally require that a commercial loan borrower make a 20%- 30% down payment. Keep in mind that the down payment amount may be negotiable, depending on the lender and the credit profile of the borrower. Below are statistics showing average loan-to-value ratios.
How to Qualify for a Commercial Real Estate Loan
MBS & Finance Corp is one of the important Industrial loan brokers in New Jersey. They are also particularly famous as Industrial loan brokers in New York These types of loans are generally used for the purchasing or renovating of commercial property. Lenders expect the property to be owner-occupied. This means that your own business will have to occupy at least 51% of the building.
Industrial loan brokers in New JerseyHere’s what lenders look for:
Lenders, Industrial loan brokers in New York, and Industrial loan brokers in New Jersey or any place look for three requirements before granting a commercial real estate loan. These requirements are related to your business’s finances, your personal finances, and the property’s characteristics.
Without a doubt commercial real estate loans require more scrutiny than residential mortgages; small businesses are generally risky, and there is no guarantee of success. Banks and commercial lenders will need to check and verify if your business has the cash flow necessary to repay the loan. The lender will calculate the company’s debt service coverage ratio which is your annual net operating income (NOI) divided by the annual total debt service. Between these two a ratio of 1.25 or greater is a typical requirement.
The lender will also verify your business’ credit score to measure your access to a commercial loan and the terms — interest rate, payback period, down payment requirement — that will apply. The minimum required FICO SBSS credit score is about 140 (the minimum for an SBA pre-screen), although there are plenty of exceptions that allow small businesses to get a loan with a score lower than the minimum. Your business should be positioned as a limited liability entity: an LLC, LP, S, or C corporation. A real estate loan to a sole proprietorship would be considered personal rather than commercial and would put your personal wealth at risk in the case of default.
Small companies are usually controlled by an owner or a few partners. Banks and commercial lenders will want to verify your personal credit score and history to see if there are instances of financial problems in the past, like defaults, foreclosures, tax liens, court judgments, and more. A low personal credit score will greatly reduce your company's chance of approval for a commercial loan.
The property being financed by the loan acts as a guarantee, and the lender has the right to seize the property if you fail to repay on time. To qualify for a commercial real estate loan, your small business will usually be required to occupy at least 51% of the building. Otherwise, you should be applying for an investment property loan instead, which is appropriate for rental properties.
Hard-money lenders give loans according to the property value with little reference to borrower creditworthiness. The property can be a commercial building, a storefront, a facility like a warehouse or a lab, or other commercial property. Single-family residences don’t qualify, although a multi-family property might if you run your business out of it and the business occupies at least 51% of the property.
In general, a lender will let you borrow up to a maximum loan-to-value (LTV) ratio — typically around 65% to 75% —this means that your company must put up the remainder as a commercial real estate loan down payment.
Types of loans at a glance
CONVENTIONAL COMMERCIAL LOAN
Conventional commercial loans are similar to what you’d get when purchasing a single-family home, but often with shorter terms. A large portion of commercial real estate investors still purchase property using traditional, fixed rate mortgages
COMMERCIAL BRIDGE LOAN
A commercial bridge loan is a source of short-term capital that is often used for debt service until an owner improves, refinances, leases, sells or otherwise completes a property transaction.
COMMERCIAL MEZZANINE LOANS
Mezzanine financing is often used to fill the “middle” of a capital stack. It can be structured in a number of ways, with both debt and equity. For instance, it can take the form of junior debt–such as a second mortgage on the property. It can also be structured as preferred equity, convertible debt or participating debt.