Unlike borrowing against your home, financing a commercial property can be a confusing and frustrating experience. There are many borrowing options for commercial real estate buyers and owners. Take the time to understand all of the elements of a lender’s mortgage program instead of simply focusing on interest rate. Becoming well informed can save you time and money during the loan origination process and in the future.
Here are eight important questions every prospective borrower should ask before selecting a commercial mortgage lender:
1. What is the maximum amount I can borrow?
You should first ask yourself: what are my capital needs both now and in the future? Some borrowers prefer to pay a slightly higher interest rate in order to maximize the amount of money they can borrow, as more cash on hand means more capital to invest in your business or additional real estate.
Typically, commercial lenders will loan up to 75 to 80 percent of the property value, requiring the borrower to come up with a 20 to 25 percent down payment. On a $500,000 property, that totals as much as $125,000 down. However, programs exist that allow you to borrow in excess of 80 percent of the property value. If maximizing cash is your primary goal, then paying a higher monthly payment may be a small price for the added capital a higher loan-to-value (LTV) ratio provides.
Additionally, you should also ask your lender if their program allows you to take out a second mortgage, either at closing or in the future. Choosing a lender that allows second liens will add flexibility in meeting your future capital needs, and will allow you to capitalize on your property appreciation without a costly refinance.
2. Is there a balloon payment?
Many commercial mortgages include a balloon payment. While balloons may be a useful option for residential borrowers looking to lower their rate, most commercial mortgages have a balloon payment, generally due in 3 to 10 years. A balloon loan will likely cause you to have to refinance the loan before the balloon date. This could mean spending thousands of dollars in closing costs, and risking a higher-cost loan if interest rates have risen. If you are in the midst of difficult times with your business or have vacancies, you run the risk of not qualifying for a loan renewal with your lender. Programs that do not require balloons may make more sense, depending on your situation.
3. How soon will I have a solid commitment, and how soon can I close?
If you are shopping for a property and need to be pre-qualified for financing, or if you are looking to close quickly, make sure you get a clear picture of your lender’s timeframe. Unlike residential mortgages, traditional commercial lenders often must review your historical income statements, asset statements and other documentation before giving you the thumbs up on your loan application. It can take weeks before you learn whether the lender wants to take you on as a customer.
4. Will I have to maintain minimum assets or deposits?
If you are looking to a bank for your commercial loan, ask your loan officer if you will be required to hold a minimum level of deposits at the bank in order to qualify for the loan.
5. What are the documentation requirements?
Many lenders require a large amount of documentation, so it’s important to ask upfront about the amount and the types of financial documents that are required. Locating and providing copies of leases, operating statements, tax returns, asset statements and other financial documents can be quite challenging and time consuming.
6. How much financial reporting is required, and what financial covenants must I make?
When obtaining a commercial loan, many borrowers are not fully aware of all the future obligations imposed by the lender, beyond simply making the monthly payment. Some lenders will require you to provide quarterly or semi-annual financial and operating statements on your business or property for as long as you are in your loan. Be certain to ask your lender about reporting requirements and financial covenants. If the risk is not acceptable to you, find another lender.
7. Is the loan assumable?
Unlike residential mortgages, it is standard for commercial mortgages to charge prepayment penalties for early repayment of a loan. If you think there is a chance you may be selling the property in the near future, ask your lender if the loan is assumable by your property buyer. Assumable loans allow a buyer to take over the mortgage terms and loan payments. It is also an excellent selling point that can enhance the marketability of your property when you list it for sale.
8. What are the total costs associated with getting the loan?
A little research upfront about the costs associated with the loan can potentially save you thousands of dollars. Be sure to ask about all costs you will be responsible for, including lender fees and points, property survey, environmental reports, and any legal fees that might be associated with the loan. Some lenders will have less expensive alternatives, or will bear these costs altogether.
When shopping for a commercial mortgage loan, remember that there are vast differences between lender programs. Different loan programs should not simply be compared based on the interest rate. Asking the questions outlined above can save you time and money.
Content provided by Commercial Direct®, a division of Bayview Financial Small Business Funding L.L.C.