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Financing Commercial Real Estate

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Financing sources for commercial real estate include mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and private investors. Commercial real estate financing can take on very different terms, and the way deals are structured is based on a number of factors, including:


  • Anticipated use of the property;
  • Anticipated returns from the property;
  • Geography;
  • Type of real estate;
  • Size of real estate;
  • Perceived risk to lender;
  • Market conditions.

Each of these areas must be examined by the business owner prior to seeking commercial real estate financing. Business owners then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth. Unlike obtaining financing for residential real estate, where the transaction is based on the value of the home at the time of the sale, commercial real estate financing will be based — in part — on the value of the business in the future.

While some lenders specialize in specific types of commercial ventures, such as warehouses, retail operations, or apartment complexes, others provide across-the-board financing to a wide variety of commercial ventures. For the business owner, the key to starting the process is to have the necessary paperwork in order. Despite the many types of financing and types of commercial real estate, lenders remain primarily concerned with the level of risk they'll be taking. Therefore, they must see the following documentation:

  • Income and expense statement for the property demonstrating a solid income stream;
  • Financial statements on all principals involved as owners of the property;
  • Profiles of the management team;
  • Property appraisal;
  • Financial statements on the borrowing entity;
  • Plans, including construction blueprints (if available) for the use of the property.

Unlike most residential real estate transactions, the potential borrower is asked to pay 1 to 2 percent of the terms of the loan (referred to as “standby points”) to show a commitment to the deal. This amount is refunded once the loan is closed. If the lender decides to offer a loan, a commitment letter is presented with their terms included. The loan agreement will usually include the length of the loan, interest rates (fixed or variable), and what the loan is for (new construction, the purchase of an existing property, refinancing). As the borrower, the business owner needs to see that the terms will allow the business to grow, and not derail such progress. Such a commitment letter or loan agreement will likely also include:


  • Closing conditions;
  • Owner occupancy requirements;
  • Affirmative and negative covenants regarding what the borrower does and does not agree to do;
  • Representation and warranties.

Once the lender and borrower have negotiated and come to mutually agreeable terms, the closing process follows, and it is usually more complex than that of a residential mortgage. Issues such as tenants, leases, environmental reports, and even zoning ordinances may all need to be factored into the closing process, which can take up to two or three months, in some cases.

The key to commercial real estate financing is to find a lender that will meet the needs of the business, and then allow the business to grow. The right business can increase the value of the real estate it occupies, but only under an agreement that allows it to move forward.

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