SubscribeThere are both fixed and adjustable rate commercial real estate loans available. These loans can be obtained with up to 30 year terms for both owner occupied as well as investment properties. These types of loans are more flexible and somewhat similar to residential programs and offer various advantages to the smaller investor.
The focus for some lenders is toward loans of a million dollars and under, with a minimum loan size of one hundred thousand. Typically, there are two distinct programs available for small balance commercial loans. The first one is similar to a bank type loan which is for investors who can document income. If the borrower is able to provide the documentation needed the loan, terms will be competitive with a bank. The second type of loan for small balances is one in which the borrower doesn’t provide any documentation. In this case there is no real underwriting done on it. The rates prove to be a little higher in this case.
A 30 year term and amortization can sometimes be offered which allows the borrower to have the same interest rate for the life of the loan. Most banks will only offer a 5 year term. This allows the borrower to spread the payments out over 30 years at slightly higher interest rates than a bank but with lower monthly payments. Another nice thing about having a long term loan is that you don’t have to repeat the loan process every five years which can by trying for a lot of people.
Some of these more innovative lenders are able to bring the loan to closing within 45 days or less. That is a lot better than the traditional commercial loan which could take several months. The only reason that it takes up to 45 days is that a commercial appraisal can take anywhere from 2 to 4 weeks to complete.
Another benefit of this type of loan program is that it isn’t a short term loan with a balloon payment. This also means that there is no ongoing financial reporting. Once the loan is established and you make your payments, you stay on without having to produce certified financial statements every quarter to keep your creditor happy.
Most banks will require financial statements as part of the covenant to their loan. This is very costly and if the bank doesn’t like what they’re seeing in terms of the latest financial information, they can pull the loan or request that you pay up immediately.
One of the big risks of balloon payments is that at the end of 5 years a balloon would be due. If you’re in trouble with your credit, or the business isn’t doing as well as you’d hoped, it’s going to be challenging to produce the money or find someone else to refinance with. Getting into a long term program with a fixed rate can provide a lot of comfort for the borrower. They will know what their payments are going to be every month as far as they can see into the future.
There are even loan programs available that will allow the investor to borrow up to 97% of the property value. There are some restrictions though. The property needs to be owner occupied. For example, the business owner will be leasing the property. It makes more financial sense for them to own it and have the tax advantages that go along with that.
The business owner can come up with as little as 3% down to buy the property. This is amazing as most banks max out at an 80% loan to value on property. This requires most borrowers to plunk down at least 20% in a typical lending situation.
The focus in some loan programs is on the strength of the personal borrower. This way, it’s not just what the business is earning or the cash flow that is being generated by the property. The borrowers own investments, income, liquidity, and other factors are used to determine if they can support the debt for their investment.
Article Author :William_Matthews
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