How to Get a Commercial Loan for Real Estate

Commercial real estate loans are a financial tool for businesses and investors to acquire, develop, or refinance income-producing properties. These loans differ from residential mortgages, often involving more stringent requirements and a complex application process due to the nature and scale of the investments. Understanding how to secure such financing is important for navigating the commercial property market. This guide outlines the stages involved in obtaining a commercial real estate loan.

Lender Requirements and Borrower Preparation

Lenders assess several factors for a commercial real estate loan, focusing on the borrower’s financial standing and the property’s income potential. Thorough preparation before approaching a lender can streamline the process and improve approval likelihood. This includes understanding loan types, borrower qualifications, property specifics, and gathering documentation.

Types of Commercial Real Estate Loans

Various commercial real estate loans cater to different needs.

Conventional bank loans, or permanent loans, are common for purchasing properties like industrial buildings, retail centers, or office spaces. They typically require excellent credit and proven business success, offering competitive rates and terms up to 25 years.

SBA loans, backed by the Small Business Administration, include the SBA 7(a) loan for real estate and other business expenses, and the SBA 504 loan for fixed assets like real estate or land. SBA loans often feature lower down payments, sometimes as little as 10%.

Bridge loans provide short-term financing, usually 3 months to 3 years, to cover immediate capital needs until permanent funding is secured or a property is stabilized. These loans are often interest-only and can have higher interest rates, typically 6.50% to 18.00%.

Hard money loans, funded by private investors, are secured by the property’s value rather than the borrower’s creditworthiness. They offer quick approval and flexibility for time-sensitive deals or properties that may not qualify for traditional financing, and tend to have higher interest rates.

Borrower Qualifications

Borrower qualifications are important in commercial real estate lending. Lenders evaluate personal and business creditworthiness, looking for credit scores of at least 660, with scores above 700 being stronger.

Financial statements, including income, assets, liabilities, and cash flow, are scrutinized to determine repayment ability. A detailed business plan outlining the project’s feasibility and repayment strategy, coupled with industry experience, also plays a role. Lenders look for a debt service coverage ratio (DSCR) of 1.25 or higher, meaning the property’s income should be at least 125% of the loan payment.

Property Considerations

Property considerations are important, as the real estate serves as collateral. Lenders assess the property type (office, retail, industrial, multifamily) and its location, which can impact interest rates.

Income potential, occupancy rates, and appraisal value are factors lenders consider. For SBA 504 loans, the business must occupy at least 51% of an existing building or 60% if constructing a new facility.

Required Documentation

Various documents are required to demonstrate financial health and project viability.

These include:
Personal financial statements, updated within 60 days, detailing all assets and liabilities.
Business financial statements, including profit and loss accounts, balance sheets, and tax returns for the last two to three years, used to evaluate historical performance and cash flow.
Property-specific documents, such as rent rolls, current mortgage statements if refinancing, and a valid purchase contract for acquisitions.
An appraisal report, environmental reports (Phase I and potentially Phase II), and a survey.

Identifying Potential Lenders

Finding the appropriate lender involves understanding the diverse landscape of financial institutions and evaluating their offerings based on project needs. Different lenders specialize in various property types and loan structures, making careful selection important.

Traditional banks, including national and community banks, and credit unions, are common sources. They often provide competitive rates and long-term stability, though credit requirements can be stringent and approval processes slower. Online and private lenders, including hard money lenders, offer more flexible terms and faster funding, often focusing on property value over borrower credit history. Commercial mortgage brokers can connect borrowers with suitable lenders and loan products.

Choosing a Lender

When choosing a lender, consider several criteria. A lender’s experience with specific property types, such as multifamily or industrial, is important.

Evaluate the loan terms offered, including interest rates, which can range from 5% to 14%. Fees, the lender’s reputation, and customer service also influence the decision. Initial engagement often begins with preliminary consultations or pre-qualification inquiries to gather information about potential loan structures before a formal application.

Navigating the Application and Underwriting Process

Once documentation is prepared and a lender identified, the formal application and underwriting process begins. This phase involves a detailed evaluation by the lender to assess loan risk and determine terms.

The initial step is submitting the compiled application package to the chosen lender. This can occur through an online portal, in person, or via mail. The package includes financial statements, property documents, and business plans.

Review and Due Diligence

Following submission, the lender initiates a review and due diligence process. This involves assessing the borrower’s financial history and the proposed project, including a credit analysis.

During this phase, the lender orders a professional appraisal of the commercial property to confirm its market value. Environmental assessments, such as Phase I reports, are commissioned, and title searches are conducted to verify clear ownership and identify any existing liens.

Underwriting

Underwriting is the evaluation of the loan request, where the lender’s team assesses the borrower’s financial health and the property’s income potential. This includes analyzing the property’s net operating income (NOI) and financial ratios like the Loan-to-Value (LTV) ratio and the Debt Service Coverage Ratio (DSCR).

The LTV ratio compares the loan amount to the property’s value, while the DSCR measures the property’s ability to generate enough income to cover its debt payments. Underwriters consider market conditions, such as local economic trends and vacancy rates.

Conditional Approval

If underwriting is successful, the lender may issue a conditional approval, followed by a commitment letter. This letter outlines the proposed loan terms, including interest rates, repayment schedule, and any conditions that must be met before closing.

These conditions often relate to additional documentation or actions required from the borrower. Responding promptly to requests for further information or clarification from the lender is important, as delays can prolong approval.

Finalizing Your Commercial Real Estate Loan

The final phase of securing a commercial real estate loan involves reviewing documents, understanding associated costs, and participating in the closing process. This stage ensures all legal and financial requirements are met before funds are disbursed.

Document Review

Reviewing all loan documents is important before signing. These documents include the promissory note, detailing repayment terms, and the mortgage or deed of trust, granting the lender a lien on the property.

It is advisable to engage legal counsel to review these agreements, ensuring all terms are understood and align with expectations.

Closing Costs

Closing costs represent various fees and expenses incurred during loan finalization, often ranging from 3% to 6% of the loan amount, or based on the property’s price. These costs include an origination fee, typically 0.5% to 1% of the loan amount.

Other fees include appraisal fees, environmental report fees, title insurance premiums, and recording fees. Borrowers may incur legal fees if they engage an attorney.

Loan Closing

The loan closing is where all parties, including the borrower, lender representatives, and legal counsel, sign the necessary legal documents. This meeting occurs at a title company or attorney’s office.

Once all documents are signed and conditions met, loan funds are disbursed. This disbursement may go directly to the borrower, seller, or other parties involved in the transaction, such as escrow accounts for property acquisition.

Post-Closing Steps

Following closing, there are post-closing steps. These include ensuring all relevant documents, such as the mortgage or deed of trust, are recorded with the appropriate county or state authorities.

Establishing the loan payment schedule and setting up the initial payment method are responsibilities for the borrower after closing.