How to Finance Commercial Real Estate

If you are buying commercial real estate, you will need to find a commercial real estate lender. Your Realtor or attorney can give you a referral.  You should speak with a few lenders to find the best loan terms and rate.  Commercial lenders generally loan money for commercial properties such as apartment buildings, retail stores, shopping centers, office buildings, mixed use and industrial properties.  Typical financing sources include: 

• Banks
• Savings and loans
• Insurance Companies
• Private investors/hard money lenders 

Commercial property transactions are structured and more complicated than residential financing.  There are a number of factors that lenders consider when financing commercial property such as:  

• Type of property
• Size of property
• Property use
• Risks to lender
• Rental income
• Environmental concerns and risks
• Market conditions 

Lenders examine these areas before they agree to loan you money.  They are looking at your borrowing strength. Commercial financing is based upon the value of your future business.     

Necessary Paperwork 

Before you find a property, you should be getting your financing lined up. Lenders need at least 45-60 days to process all the paperwork to get your loan completed. You will need the following financial information to submit to your lender so that they can evaluate their risk:  

• Income and expense statement for the property
• Owners financial statements
• Rent rolls and copies of leases
• Property vacancy information
• Information regarding your management team
• Property appraisal;
• Financial statements on the entity borrowing the money
• Business plans and expansion plans 

Getting qualified for your financing first puts you in a stronger bargaining position with the seller when you find a property because the seller knows you are qualified to close the transaction.  Have a backup lender available as well in case something falls through with the first lender. Then you know for sure you have financing.

Loan Commitment      

Expect to pay 1 -2 percentage points of the loan. These are called “standby points” to show you are serious about making a commitment to the transactions. The lender will give you a commitment letter which includes the following: 

• Loan term
• Interest rate
• Loan purpose
• Type of property you are purchasing
• Closing requirements
• Owner occupancy requirements
• Representations and warranties 

Once you and your lender work out the financing terms, then you can proceed with your due diligence and inspections.  Your lender will want to review the property title information and survey and environmental reports, if applicable. You and your attorney should review these reports as well as property inspections reports.  The lender will require that you purchase a lender's title policy in the amount of your loan to protect the lender's interest against any claims for defective title.  Closings generally take 60- 90 days or longer. The key to a successful commercial closing is finding the right lender that recognizes your business needs and is willing to work with you to let your business grow.

Attorney Assistance

You should have a commercial real estate attorney review you loan documents before you sign them to make sure your lender has not made any errors or violated any lending laws.  If you are using private financing. it is also a good idea to have your attorney help you with the negotiations.