Commercial real estate loans are a different animal than their home mortgage counterparts. Learn the differences so that you are prepared when walking in to the commercial lender.
There’s a few basic differences when it comes to commercial real estate loans versus home mortgages. While both require due diligence and forethought, CRE loans have increasing regulations and restrictions and are not as easy to qualify for. One of the big surprises for those just entering the market may be the balloon payments associated with commercial real estate loans.
A balloon repayment plan starts with the same terminology. It may be a 30-year mortgage with payment on both interest and principal. But that is where the similarity ends. Following a preset time of 3, 5 or 10 years, a balloon payment is due, at which point the entire outstanding balance is payable. Needless to say, this is where many a business falls through the cracks.
And what happens as the balloon payment nears? If they have not been able to put aside a substantial savings, business owners and developers begin to look for alternative funding which is not always easy to secure. But if the business has had cash flow problems or the development has hit a few snags, a balloon payment may not be a feasible option for the borrower. At this point, they must try and refinance and, depending on their last three- to five-year financials, may or may not qualify for a loan. The other scenario is a business that is doing fairly well, but the lender has decided they want to get out of that particular CRE segment.
Secure a sufficient down payment in order to increase the chances of affording your investment.
Obtaining a down-payment of 20 to 30 percent will help ease both traditional and non-conventional lenders. After all, if someone has some “skin in the game” it makes it that much harder to simply walk away. In addition to coming up with a larger down payment, requesting an initial loan that has a little cushion in case of project delays can help ease the pressure.
Come prepared with three to five years of tax records, balance sheets, cash flows, income statements and a business plan. Keep in mind the debt-service-coverage as well as the loan-to-value ratio. For conventional lenders, a good credit score is also required. Because of the increased risk, commercial real estate loans have higher interest rates and shorter terms. Be sure to check on potential prepayment penalties as well.
Unlike home loans, CRE loans are not done once the papers are signed. Some lending institutions require that you continue to provide quarterly or annual income statements. Loan covenants may include maintaining a certain debt-to-income ratio or cash flow. For those just entering into CRE investments, unconventional loans often offer the best solution. At Level 4 Funding, we work with private investors who offer hard money loans on most types of CRE projects. Approval is often accomplished within 24 hours with funding close on its heels—sometimes in less than a week. Call us for a no-obligation quote.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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