Monthly Newsletter with a spotlight on real estate issues that affect our Clients
How to Qualify and Prepare for Commercial Real Estate Loans
Mortgage rates are still very attractive which makes it a good time to consider making a real estate purchase and obtaining a loan to purchase and/or renovate a commercial property.
The most desirable loans that banks will look to give are owner occupied. This means your business would occupy more than half of the building.
Lenders apply different parameters to analyze commercial loans than residential loans and typically focus on three areas of review: Owner’s personal finances; business finances; and the property.
Business loans are riskier for the lenders so the degree of scrutiny is quite high. Before starting a commercial loan process, a borrower should take the time to ensure that its paperwork is completely in order. We have seen borrowers get denied as a result of disorganized paperwork, lack of proper paperwork documenting the corporate or company structure (i.e. incomplete or missing partnership agreement; no bylaws or stock certificates, lack of good standing).
From a financial perspective, a lender will calculation your business’ debt service coverage ratio (annual operating income divided by annual debt (how you will be paying back on the loan). Typically banks want a ratio of 1.25 or higher but alternative lenders may accept other scenarios. Of course credit scores of the business and its owners will also be a factor for lenders.
Owners of the business would likely be required to act as personal guarantors on commercial loans so their personal finances would be reviewed by lenders as well. Credit scores, prior bankruptcies or foreclosures of the owners of the business would be reviewed as well to assess their creditworthiness.
Of course the property itself is also a critical part of a lender’s review. An appraisal would be required. Lenders would want to review any leases that would be assumed by the new owner or new leases that would be issued.
Lenders will calculate a Loan-to-Value (LTV) ratio which is the mortgage amount divided by the appraised value of the property.. Conventional lenders like to see a 65% to 75% LTV while hard money lenders can accept more risk.
Before starting a commercial loan application process, Borrowers are well advised to bring all of the documentation in order before even approaching any lender. Lenders want to see well organized business records and financial statements with owners who are knowledgeable and responsive.
Therefore, we recommend that you prepare:
3 to 5 years of business and personal tax returns
All corporate/company records should be in good order (formation documents and filing receipts; partnership agreements that are executed; stock certificates and corporate books that are filled out; current executed buy-sell agreements; current insurance policies with proper coverage and the like)
Business plan, budges and financial statements
Other documents that give a lender the full picture of your business operations
The attorneys at Beress & Zalkind PLLC are well versed in representing borrowers and lenders on various commercial loans and real estate transactions. It is prudent to get us involved early in your transaction so that we can assist you in working with your lender to get the full documentation in in a timey and complete manner to give you the best chance for loan approval.
We can assist with structuring your personal and business affairs, preparing for creditor and asset protection and ensuring that you are in the best position to acquire any real estate property and successfully operate your business.
Please contact the attorneys as the Law Firm of Beress & Zalkind PLLC at 718 513 3588 or email at firstname.lastname@example.org.