Commercial Real Estate Tips: Financing Tips
Paying for Commercial Real Estate
You’ve decided to buy your ideal office, retail or industrial space. Now’s the time to determine how to finance the purchase.
Once you have decided to purchase a commercial real estate space, it’s a good idea to determine how you will pay for the property before getting too involved in the process. Here are some of the more popular methods.
SBA 504 Loans
SBA loan programs provide long-term, fixed-rate financing to small businesses to acquire real estate for expansion or modernization.
Typically, a 504 project includes
- a loan secured from a private-sector lender with a senior lien
- a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost
- a contribution of at least 10% equity from the borrower.
The maximum SBA debenture generally is $1 million and up to $1.3 million in some cases.
Adjustable Commercial Mortgage
This commercial loan periodically adjusts the interest rate tied to a specific index such as the prime rate or T-bills.
Construction Loan and Take-out
This commercial construction loan is tied in with a pre-arranged takeout loan in place.
Fixed Rate Commercial Mortgage
This commercial mortgage has an interest rate that remains constant throughout the term.
Hard Money Loan
A commercial loan from private lenders is based primarily on the property’s value.
Bridge Loan
This is a short-term, interim or project-type commercial loan that lasts usually no longer than two years.
Joint Venture
Funds are provided by a financial partner who has a financial interest in the development or ownership of the property.
Sale-Leaseback
A lender purchases land and leases it back to the borrower for a fixed rent plus other considerations. This type of commercial mortgage can produce more dollars than a typical commercial mortgage, depending on strength of the borrower.
Second Mortgage
A commercial loan is secured by equity, but behind that of the first lien.
Wraparound Mortgage
A lender makes a second mortgage and assumes the first mortgage.
General Lending Criteria
- Banks usually will not finance more than 75% of the appraised value of the property. An SBA 504 loan requires a 10% down payment from the borrower.
- Properties must show sufficient debt-repayment ability by way of a debt coverage ratio of 1:20X or higher on income.
- In cases where the property is occupied by a single tenant, the lender will want to see the financial strength of the tenant.
- You will need to provide to the lender an updated rent roll, which you might have to update yearly.
- The lender most likely will require an environmental phase-I audit to discover any possible contamination of the site.
- Personal guarantees of the principal owners probably will be necessary.
Commercial Real Estate Group of Tucson can help you determine which loan works best for your situation. Contact our tenant representation company to learn more.
