Acquiring a commercial property for your business is a significant step that involves various complexities and considerations. This comprehensive guide outlines what you need to know about commercial loans to make an informed decision.
Liberty Capital will help guide you throughout the process and our network of lender will be accessible to you during the approval and funding process. You will be working with a fully licensed commercial loan broker. We don’t do residential, or primary real estate loans.
- Understanding Commercial Loans
Definition: A commercial loan is a debt-based funding arrangement between a business and a financial institution, typically used to fund major capital expenditures or cover operational costs that the company may otherwise be unable to afford.
- Types of Commercial Loans
Term Loans:
- Fixed amount for a specific term, usually with a fixed interest rate.
- Terms for commercial property or real estate up to 30 years.
SBA Loans:
- Backed by the Small Business Administration.
- Include 7(a) loans for general purposes and 504 loans for real estate and equipment.
Commercial Real Estate Loans:
- Specifically for purchasing property.
- Includes conventional mortgages, SBA 504 loans, and hard money loans.
Construction Loans:
- For building a new property or renovating an existing one.
- Typically have higher interest rates and shorter terms.
Bridge Loans:
- Short-term financing used to ‘bridge’ the gap between a purchase and long-term financing.
- Higher interest rates due to short duration.
- Loan Qualification Criteria
Creditworthiness:
- Personal and business credit scores are critical.
- A higher credit score (typically above 680) improves chances.
- Net-worth must be apparent to cover unforeseen expenses
Business Financials:
- Strong financial statements, including profit and loss statements, balance sheets, and cash flow statements.
- Demonstrated profitability and steady income streams.
Collateral:
- Commercial property itself often serves as collateral.
- Additional collateral might include other business assets.
Down Payment:
- Typically, 20-30% of the property value.
- Higher down payments might be required for higher-risk borrowers.
Debt Service Coverage Ratio (DSCR):
- Measures the business’s ability to repay the loan.
- A DSCR of 1.25 or higher is generally favorable.
- Application Process
Preparation:
- Gather financial documents: tax returns, financial statements, and business plan.
- Ensure all paperwork is accurate and up to date.
Choosing the Right Lender:
- Research potential lenders: banks, credit unions, online lenders, and SBA-approved lenders.
- Consider interest rates, loan terms, fees, and lender reputation.
Application Submission:
- Complete the loan application form.
- Submit all required documentation.
- Be prepared for a thorough review process.
Loan Approval and Closing:
- After approval, review loan terms carefully.
- Ensure understanding of repayment schedule and any penalties for prepayment.
- Closing involves signing legal documents and might require legal assistance.
- Interest Rates and Fees
Interest Rates:
- Can be fixed or variable.
- Influenced by market rates, credit score, loan term, and loan type.
Fees:
- Origination fees, application fees, appraisal fees, and closing costs.
- Early repayment fees in some cases.
- Legal and Tax Considerations
Legal:
- Property zoning laws and regulations.
- Lease agreements if part of the property will be rented out.
Tax:
- Mortgage interest may be deductible.
- Depreciation of the property for tax purposes.
- Benefits and Risks
Benefits:
- Potential property value appreciation.
- Control over the property, unlike leasing.
- Potential rental income from unused space.
Risks:
- Significant financial commitment.
- Potential for property value depreciation.
- Responsibility for property maintenance and management.
- Post-Purchase Considerations
Property Management:
- Decide whether to manage the property yourself or hire a property manager.
Maintenance:
- Regular maintenance to preserve property value.
Insurance:
- Adequate property and liability insurance coverage.
Key Credit Requirements and Financial Ratios
Credit Score:
- A good personal and business credit score is essential. Lenders typically look for a credit score of at least 680, although higher scores (700+) can improve your chances and potentially secure better terms.
Loan-to-Value Ratio (LTV):
- LTV ratio determines how much loan amount you can get relative to the property’s value.
- Commercial loans often have an LTV of 65-80%. This means you might need to provide a down payment of 20-35%.
Down Payment:
- Typically ranges from 20-30% of the property value.
- Larger down payments can improve your chances of loan approval and might secure better interest rates.
Documentation Required for Loan Application
- Financial Statements:
- Profit and Loss Statements
- Balance Sheets
- Cash Flow Statements
- Business Tax Returns (last 2-3 years)
- Personal Financial Information:
- Personal Tax Returns (last 2-3 years)
- Personal Financial Statements
- Business Plan:
- Detailed plan outlining your business model, market analysis, and projected financials.
- Loan proposal indicating how the funds will be used and repayment strategy.
- Property Details:
- Property Appraisal: Independent appraisal to determine market value.
- Broker’s Opinion of Value (BOV): A professional assessment provided by a real estate broker.
- Purchase Agreement: Signed contract of the property purchase.
- Other Documents:
- Articles of Incorporation or Organization
- Business Licenses
- Lease Agreements (if applicable)
- Rent Roll (for rental properties)
- Environmental Reports (if required)
Key Considerations for Lenders
Experience:
- Lenders often prefer borrowers with experience in managing or owning commercial properties.
- A strong track record in your industry can be advantageous.
Cash Flow:
- Demonstrating sufficient cash flow to cover loan payments is critical.
- Lenders will look at your Debt Service Coverage Ratio (DSCR), which should ideally be 1.25 or higher.
Occupancy Type:
- Owner-Occupied: Indicates you will use the property for your own business operations. This can sometimes lead to better loan terms due to perceived lower risk.
- Rental Property: If you plan to rent out the property, lenders will evaluate rental income and tenant quality.
Steps to Prepare for a Commercial Loan Application
- Assess Financial Health:
- Review and improve your credit scores.
- Ensure your business financials are strong and up-to-date.
- Gather Documentation:
- Compile all necessary financial statements, tax returns, and legal documents.
- Obtain a recent property appraisal and, if necessary, a broker’s opinion.
- Choose the Right Lender:
- Research potential lenders (banks, credit unions, online lenders, SBA lenders).
- Compare interest rates, loan terms, fees, and lender requirements.
- Prepare a Strong Application:
- Ensure all paperwork is accurate and comprehensive.
- Write a compelling business plan and loan proposal.
- Consult Professionals:
- Consider working with a commercial mortgage broker.
- Seek advice from financial advisors and legal professionals.
Post-Approval Considerations
- Property Management:
- Decide if you will manage the property yourself or hire a property management firm.
- Maintenance and Insurance:
- Regular maintenance is crucial to preserve the property’s value.
- Obtain adequate property and liability insurance.
- Monitoring Financial Performance:
- Regularly review your financial performance to ensure you can meet loan obligations.
- Maintain a healthy cash flow and keep an eye on market conditions.
What do I need to apply?
- ONLINE APPLICATION: You can fill out our initial application, upload documents. We do soft-inquiry, and our lender will do hard inquiries once you are approved.
Commercial Loan Structure and Terms: A Buyer’s Perspective
When securing a commercial loan for purchasing property, understanding the structure, terms, and associated costs is crucial. This section will delve into the specifics of commercial loan structures, interest rates, terms, and fees that a buyer should consider.
Loan Terms and Interest Rates
Loan Terms:
- Short-Term Loans: Typically, 1 to 5 years. Used for immediate financing needs, often with higher interest rates.
- Long-Term Loans: Can extend up to 25 years, particularly for SBA 504 loans. Generally, these come with lower monthly payments but higher overall interest costs.
Interest Rates:
- Fixed Rates: The interest rate remains constant throughout the loan term, providing predictability in monthly payments.
- Variable Rates: The interest rate can change periodically based on market conditions, potentially leading to fluctuating monthly payments.
- Hybrid Rates: Often start with a fixed rate for a set period, then switch to a variable rate.
Loan Structures
Interest-Only Loans:
- Borrowers pay only the interest for a specific period (commonly 5-10 years), resulting in lower initial payments.
- After the interest-only period, borrowers begin paying both principal and interest, leading to higher payments.
Amortizing Loans:
- Regular payments cover both interest and principal, gradually reducing the loan balance over time.
- This structure leads to higher initial payments compared to interest-only loans but reduces overall interest costs.
Bridge Loans:
- Short-term loans designed to bridge the gap between immediate financing needs and long-term financing solutions.
- Typically used when immediate capital is needed but the borrower plans to refinance to a more permanent loan.
- Higher interest rates due to their short-term nature and perceived risk.
Early Payoff Options:
- Some loans include prepayment penalties if the loan is paid off early.
- It’s essential to understand these terms to avoid unexpected costs if you plan to pay off the loan ahead of schedule.
Refinance Options:
- Borrowers may refinance to take advantage of better interest rates or to switch from a short-term bridge loan to a long-term loan.
- Refinancing can incur additional costs, but it might save money in the long run by reducing interest rates or monthly payments.
Fees and Closing Costs
Origination Fees:
- Charged by the lender for processing the loan.
- Typically range from 0.5% to 1% of the loan amount.
Appraisal Fees:
- Cost of a professional appraisal to determine the property’s market value.
- Usually ranges from $2,000 to $5,000, depending on the property’s size and complexity.
Legal Fees:
- Costs associated with legal services for drafting and reviewing loan documents.
- Can vary widely depending on the complexity of the transaction.
Environmental Assessment Fees:
- Required for properties that might be subject to environmental regulations.
- Phase I Environmental Site Assessments can cost between $1,500 and $6,000.
Title Insurance:
- Protects against potential disputes over property ownership.
- The cost is typically a small percentage of the property value.
Survey Fees:
- Required to verify property boundaries and identify any encroachments.
- Costs range from $500 to $1,000.
Recording Fees:
- Charges for recording the property transaction with local government offices.
- Generally, range from $100 to $250.
Example Scenario: Structuring a Commercial Loan
Imagine you’re purchasing a commercial property valued at $1,000,000. Here’s how the loan structure might look:
- Down Payment: $200,000 (20% of property value)
- Loan Amount: $800,000
- Interest Rate: 5% fixed for 10 years, then adjustable
- Loan Term: 20 years.
- Monthly Payment (Interest-Only for 5 Years): Approximately $3,333
- Monthly Payment (Amortizing after 5 Years): Approximately $5,278
Closing Costs Estimate:
- Origination Fee (1%): $8,000
- Appraisal Fee: $3,000
- Legal Fees: $2,500
- Environmental Assessment: $4,000
- Title Insurance: $2,000
- Survey Fees: $750
- Recording Fees: $150
Total Closing Costs: $20,400
Understanding the terms, rates, and structure of commercial loans is essential for any business owner looking to purchase their first commercial property. By familiarizing yourself with different loan structures, potential fees, and associated costs, you can better navigate the financing process and make informed decisions that align with your business goals. Always consult with financial and legal professionals to ensure you’re getting the best possible terms and fully understand your obligations.
All these doesn’t guarantee approval. Market condition will dictate whether there’s an appetite for your asset class. At this juncture, you will have more lenders for apt complex projects than a an office building project.
Why Choose Liberty Capital for your Commercial Loans.
Choosing the right financial partner for your commercial loan is a crucial decision that can significantly impact your business’s success. Liberty stands out as the ideal choice for business owners seeking to purchase their first commercial property due to our commitment to personalized service, competitive rates, and flexible loan structures tailored to meet your specific needs.
At Liberty, we understand that every business is unique. Our experienced team works closely with you to understand your goals and financial situation, ensuring that we provide solutions that align with your vision. With our extensive portfolio of loan options, including interest-only loans, bridge loans with refinance options, and long-term fixed-rate loans, we offer the flexibility you need to manage your cash flow effectively and invest confidently in your future.
Moreover, Liberty’s transparent approach to fees and closing costs ensures that you won’t encounter any surprises. Our dedicated loan officers guide you through every step of the process, from application to closing, making the experience seamless and stress-free.
By choosing Liberty for your commercial loan, you’re not just securing financing; you’re gaining a partner committed to your long-term success. Let us help you unlock new opportunities and achieve your business ambitions. Join the many satisfied business owners who have trusted Liberty to support their growth and prosperity.
Choose Liberty—where your business’s future is our priority