Commercial Real Estate Financing
Whether choosing to lease or purchase commercial real estate for your business or investment, the terms can be daunting.
Commercial Real Estate Leasing
Most businesses lease space, and many enter lease contracts that constitute a significant financial commitment without meaningful attempts to negotiate the terms.
Standard leases do not exist, and whether forms appear standard or preprinted, terms can be negotiated. Leverage in negotiations depends on factors including competition for space and the amount of time the space was vacant.
Here are key terms to be negotiated in a lease:
- Rent and security deposit amounts
- Assignment of responsibility for additional expenses of operation, including insurance, utility expenses, property enhancements and maintenance
- Permitted use and enhancement of premises, including subletting
- Terms of lease renewal and cancellation
- Option for addition or reduction of space if needed by tenant
Commercial Real Estate Financing
Business loans and commercial real estate loans are the primary methods of commercial real estate financing. Though seemingly similar, the underwriting consists of two separate and distinct areas of banking. The type of financing depends on the property financed. Business loans secured with real estate are based on potential business income rather than potential rental income. True commercial real estate loans do not require personal guarantee and are considered nonrecourse, or no-guarantee, loans. The borrowers credit and financial history is important, but the loan viability is primarily determined by the property.
Businesses must obtain a commercial real estate appraisal when approaching a commercial real estate lender. Commercial real estate appraisers can be found on the Internet and through local commercial real estate resources. When selecting an appraiser, look for a State Certified General Appraiser with several years experience in commercial appraisals of the type of property and in the property market you are interested in. In addition, look for relevant graduate level education, national commercial appraisal designation and familiarity with required appraisal format.
Choosing a Commercial Real Estate Lender
There are several questions you must ask when obtaining commercial real estate financing. First, you must find out what documentation is required to pre-qualify.
The next step in evaluating a commercial real estate loan or commercial real estate mortgage is to determine the maximum amount you can borrow. Once this has been established, calculate the total cost associated with the loan, including appraisal, survey and legal fees to evaluate whether the cost of capital is competitive.
It is standard for commercial mortgages to include prepayment penalties. When reviewing the mortgage, ask if the loan is assumable if you should choose to sell.
Next, make sure you are fully aware of all future obligations imposed by the lender, including reporting requirements and covenants. If you work with a bank, ask your commercial real estate lender if you will be required to hold a minimum level of deposits at the bank to qualify for the loan.
The final step is to make sure you have a solid commitment from the lender and a clear understanding of when your commercial real estate loan or commercial real estate mortgage can close.