Business Owners Must Understand How Commercial Property Loans Work.

Securing a commercial real estate loan is a critical step for any business that requires office space, a retail storefront, or a manufacturing and shipping space. A commercial loan is needed whether you intend to purchase, refinance, or redevelop commercial real estate.
This process is notably different from obtaining a residential mortgage, requiring a distinct approach and understanding. By comprehending these differences, adequately preparing, and knowing what to expect in terms of timeline, you can significantly enhance your chances of successfully securing a commercial loan.

Commercial Vs. Residential Loans

The primary distinction between commercial and residential loans lies in their purpose and use.

Residential loans are for purchasing or refinancing single-family homes or multifamily properties with up to four units, predominantly for personal use.

In contrast, commercial loans are designed for properties intended for business activities, such as office buildings, retail spaces, industrial warehouses, and larger multifamily properties.

Loan Terms And Structure. When it comes to loan terms and structures, residential loans typically offer longer terms, ranging from 15 to 30 years, and often include fixed interest rates. Lenders place considerable emphasis on your personal credit history and income.

Conversely, commercial loans usually have shorter terms, between five and 20 years, and may come with either fixed or variable interest rates. These loans often include a balloon payment at the end of the term. The focus for lenders is more on the property’s income potential and the nature of the business operations.

Down Payments And Interest Rates. The requirements for down payments and interest rates also vary. Residential loans generally require down payments ranging from 3% to 20%, depending on the loan type and your creditworthiness. Commercial loans demand larger down payments, typically between 20% and 30%, reflecting the higher risk associated with commercial properties. Consequently, interest rates for commercial loans tend to be higher than those for residential mortgages.

Before You Apply

Before applying for a commercial property loan, thorough preparation is essential.

Financial Documents. Lenders will require a comprehensive portfolio of financial documents, including profit and loss statements, balance sheets, and cash flow statements for the past few years. Additionally, both business and personal tax returns for the last two to three years are typically necessary to assess your financial health and stability. Credit reports for both personal and business accounts will be scrutinized, so it is crucial to ensure their accuracy and address any discrepancies beforehand.

Business Plan. A well-crafted business plan is also vital. This plan should demonstrate how the property will generate income and detail projected revenues and expenses. Highlighting any relevant experience in managing similar properties or businesses can be advantageous.

Physical Property Information. Detailed information about the physical property itself is also necessary. You must provide a third-party professional appraisal to determine the property’s market value and ensure it meets the lender’s standards.

Lease Agreements. If the property is to be leased out, copies of existing or proposed lease agreements should be provided to demonstrate the potential income stream.

Compliance. Finally, ensuring the property adheres to all zoning laws and local regulations is imperative. Any legal issues can derail the loan application.

Down Payment. Proof of funds for the down payment must be shown, which may involve providing bank statements or other documentation verifying the availability of the necessary capital.

Consulting with a commercial real estate attorney and a financial advisor during this preparation stage can make for a smoother application approval process, which may take longer than you think.

Timeline

Understanding the timeline and what to expect during the loan process can help you navigate it more efficiently.

Pre-application. The pre-application preparation phase can take one to two months. This is the time you’ll spend gathering all financial documents, finalizing your business plan, and ensuring your credit reports are accurate.

Application Submission. Once the preparation is complete, the loan application submission typically takes one to two weeks. When you submit the loan application and necessary documentation, be prepared to answer any initial questions from the lender and provide additional information, if needed.

Loan Underwriting. The loan underwriting phase follows, usually taking two to four weeks. During this stage, the lender conducts a thorough review of your financial documents, business plan, and the propertyís appraisal. This phase may involve back-and-forth communication to clarify details or provide additional documents. Upon completion of the underwriting process, the lender issues a loan commitment, outlining the terms and conditions of the loan. Reviewing this commitment carefully and addressing any concerns or questions with the lender is crucial.

Closing. Finally, the two- to four-week closing process involves finalizing all loan documents, conducting a title search, and purchasing title insurance. Ensuring that all legal and regulatory requirements are met and preparing for any closing costs are essential steps.

The entire process from preparation to closing can take anywhere from two to four months. though this timeline can vary based on the complexity of the loan and the responsiveness of all parties involved.

Obtaining a commercial property loan involves a far different set of requirements and elongated timeline compared to residential loans. By understanding these differences and preparing thoroughly, you as a business owner can navigate the loan process more effectively. Partnering with experienced professionals, such as commercial real estate attorneys and financial advisors, can provide valuable guidance and enhance the likelihood of a successful loan application.

Tags | Commercial | Loans
  • Taylor is a Project Specialist and Marketing Coordinator for Owner Builder Advisors, where he helps developers and owners navigate the construction process. He has been actively involved in the construction and inspection industries since 2016. He also manages marketing campaigns, social media, and document generation/compilation for both formal and informal application processes. Taylor is a new father who enjoys spending time with his family and taking long bike rides.

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