Financing Owner Occupied Commercial Real Estate
The current economic climate has enabled strong demand for business owners to seek commercial properties to acquire to accommodate their real estate requirements.
Interest rates continue at historic lows, banks have cleaned up their balance sheets since the last recession and there is a lot of capital available. While finding the right property for our clients is obviously the most important step in the process, after a property is identified, there remains the process of securing financing for the purchase of the property.
There are many different types of commercial loan products to choose from and the current lending environment is competitive. Interest rates can be pegged to different types of benchmarks other than 10 year treasury bills, as is the case with residential loans such as Libor, Prime and other rates. Furthermore, the length of the term of the loan can vary. Typically this is 5, 7 or 10 years with a balloon or refinancing mechanism. In these types of loans the amortization schedule is not coterminous to the length of the loan. The amortization schedule of a commercial loan can also vary, but is typically 20 or 25 years. The various parameters of a loan are affected by many factors that are tied to the risk assessment of the loan. The credit of the buyer, amount of down-payment, the location and characteristics of the property and the risk tolerance of the lender are some of these factors. Some lenders can be more aggressive than others with loan packages offered to the buyer. For this reason, a buyer should shop the loan with a few different banks to get the best loan terms.
A buyer may also want to consider an SBA 504 loan as a financing option. This is a federal government sponsored loan package that many of my clients have taken advantage of and geared toward owner occupied commercial real estate. The appeal of this type of loan is basically two-fold: first, a buyer can obtain a 504 loan with just 10% down payment as opposed to a typical down payment of 25%. Second, the SBA finances 40% of the acquisition cost at a fixed interest rate, and over the full amortization schedule of typically 25 years. This can save a buyer a great deal of money. The lender also finds this type of loan attractive as it minimizes their risk to 50% of the loan amount. Most banks offer 504 loan packages and team up with an SBA conduit to process the loan.
Once selecting a lender, it is important that the buyer be a part of the bank’s loan approval process to make sure the loan navigates through the due diligence process in accordance with the terms and timelines set forth in the Purchase and Sale Agreement. Several of my clients have experienced instances whereby the lender processed the loan under their own timeline, missed critical dates and put the buyer in a position of jeopardizing its position in a deal and even forfeiting its deposit. Please note that a bank will require a satisfactory appraisal and environmental report as part of the loan approval process. The cost for these reports is the buyer’s responsibility. The buyer should consult with its attorney and their real estate broker to assist them with the loan process. A professional and experienced commercial real estate broker can be a valuable resource to a buyer throughout the financing process.
Please contact me for further advice on these complex lease issues.
Warren Brown, President, Boston Commercial Properties