Solutions For Commercial Property Financing
Commercial Properties require a very specialized type of commercial real estate financing. Commercial
Properties are certainly not a typical business or small business, but Commercial
Properties nevertheless have very real and substantial financing needs.|
Before addressing possible solutions for the most common Commercial Property financing needs, it is important to discuss the typical barriers to obtaining Commercial Property loans. Historically Commercial Property financing has been difficult to arrange for several reasons:
Purchasing Solutions For Commercial Property Financing Difficulties
(1) Commercial Property properties are unique. Lenders are therefore concerned that if commercial loan payments are not made in a timely manner and the lender is required to assume ownership of the property, it will be very difficult to find a new owner because of the unique property features.
(2) Lenders frequently want "personal guarantors" for Commercial Property loans, and this requirement is not appropriate for Commercial Property financing. The financial structure of Commercial
Properties simply does not lend itself to a traditional lender/guarantor approach. But most lenders are uncomfortable with the potential lack of guarantors (especially because of the previous observation about the difficulty of reselling the Commercial Property property should it become necessary).
(3) When Commercial Property financing is obtained, there are frequently unacceptable terms such as very small loans, low loan-to-value (LTV) of 50% to 60%, short-term loans and high interest rates. These onerous terms are tantamount to the Commercial Property loan being declined, and if the terms are accepted, the Commercial Property is likely to experience continuing financial difficulties due to unrealistic commercial mortgage requirements.
(4) Construction, renovation and land acquisition are even more difficult for Commercial
Properties to finance than purchases or refinancing. As a result, needed repairs are often postponed indefinitely and new Commercial
Properties frequently take many years to become a reality.
There are common-sense financing solutions for the issues described above. Here is an overview of Commercial Property financing that is now available from some non-traditional lenders:
(1) Non-Recourse Loans (instead of guarantors). As noted above, the willingness to forego traditional guarantors does require a non-traditional lender.
(2) Long-term loans (up to 30 years). Commercial Property financing will be much more successful when it is long-term instead of short-term (payments will be reduced dramatically).
(3) Low interest rates (usually prime plus 1%). In reality many Commercial
Properties have been taken advantage of and charged excessive interest rates because lenders perceived that they did not have any other realistic options. With payments based upon a rate in the range of prime plus 1%, Commercial Property loan payments will be reduced dramatically (and in combination with longer-term loans, the overall payment reduction will make a significant contribution to Commercial Property cash flow improvements).
(4) Minimum loan size of $500,000. This allows Commercial Properties to complete most financing in one step rather than piecemeal over a period of years.
(5) High LTV (75% to 85% is available). This results in a more workable amount of 15% to 25% (rather than 40% to 50% with traditional Commercial Property financing) for the down payment or non-financed portion in refinancing.