How Does Commercial Real Estate Financing Work?

Posted on February 22, 2024

On February 12 2022 Fox News reported that Ian Jacobs claims to be heading to downtown San Francisco where he started buying offices on the cheap. He believes that the time is ripe for him to pick up some bargains in the current real-estate market. He believes that San Francisco will take about 10 years to recover from this present downturn. He is doing this even as some of the largest malls in the city are losing customers. Such action you could have easily dismissed except that it is from a man who comes from a storied Commercial Real Estate family albeit from Canada; however it should be noted that he also once worked for Warren Buffett.

Could this be a good time to get involved in CRE? What does one need to get into Commercial Real Estate? Many small time investors who started their real estate journey doing Fix and Flips are now considering moving on to something bigger; should CRE be it? Should you be one of those seeking to make such a move? What are the steps that you need to take to get there from where you are now?

Commercial Real Estate Acquisition

Getting to the position of ownership of Commercial Real Estate requires quite some planning and execution. You will need to choose a city or town where that investment is to take place. Property type will have to be decided on. A timeline will have to be set and this will most likely be decided by your budget and resources. You will have to assemble a team of experts to work with you on all aspects of the acquisition of the property to be acquired. This will include Brokers, Accountants, Consultants, Environmental Consultants, Property Inspectors, Attorneys and this is only the start.

Should you be thinking of starting a Ground-up construction project this will require a different set of team remembers. Maybe you might go in for a Flagged Hotel or maybe build a Mall of your own. If that be the case then your team might include Contractors of different kinds. They will be those taken from the building industry trade. This will require a longer set time given to planning.

Securing Funding

Having selected your team it will be expected that you will also have done your homework and property type will already have been selected. Things like Investment Objectives, Budget Timeline, Source and type of funding will also have been decided on. Since most investors will not empty their accounts of their own cash, then a bank, or lender will have already been decided. CRE loans being mostly large loans reaching into the millions then a Non Recourse Loan most likely will have already been negotiated to fund this purchase.

Your lender would like to see that you have done some market research on the type of property that you are interested in. They will also need a report of the property, inspection and comparable pricing of similar properties sold in that city or town, simply called ‘Comps.’ You will need to show occupancy records and what revenue they generated. They will be seeking to know if the rent generated will safely cover your monthly payments. That includes all costs including the payments on the loan. During this time you will have begun negotiating with intent to closing the contract on the property. In fact before you can secure any type of funding you and your team will need to have done your inspection of the property, including having shopped around for the best funding available. Is it an SBA loan? Or will it be Private funding?

Types of Funders Available

There is a lot of talk going around that Commercial Real Estate is going through some rough times financially if you believe you might conclude that CRE is dead. For whatever that might be there is quite a lot of money available for anyone willing to invest in CRE at present. You have Government agencies like Freddie Mac and Fannie Mae offering funding for specific types of properties through special lenders and most likely their funding is at better terms than most others that’s available. You can also add most Commercial Banks and Credit Unions to this list.

To obtain better terms and more flexible ones you might have to apply to private lenders, however you will have to settle for higher rates and in some instances give up equity in what you are purchasing. That does not come cheap. If you are still having problems with funding there are always Hard Money Lenders. These folks are definitely not on the cheap end of the scale. They will not offer rates like the ones mentioned before and they most likely will not go over 65 % loan to value. Of all that you might fear about Hard Money Lenders is the fact that their loans are only available on short terms. That just might  leave you standing between a rock and a hard place.

No need to despair quite yet  however; there are still more places that offer funding for Commercial Real Estate. You can turn to ‘Real Estate Investment Trusts.’ They can provide debt financing through private placements or publicly traded shares, offering diversification and potential access to larger projects.

CRE Loan Qualifications

So far we have been focusing on all the objections we might encounter in obtaining a loan from a lender. However one thing that we have yet to focus on is the borrower. What are you bringing to the lender that should make them willing to entrust you with their capital? What is the (LTV) Loan to Value that you are seeking for your loan? You will need to understand that if you have very little capital of your own to invest in your project, or you are not willing to tie up a lot of it, the lender will by way of security offer you a loan at a higher interest rate. One way to raise more capital might be to pull together a group of investors, with each owning some equity in the property.

Different loans will have different financing terms offered. An acquisition loan will be structured totally different to a Ground-up construction loan and this will of itself impact the loan and the terms being offered. Your experience and time in the industry whatever it is that might be; will get you better terms if your answers to the questions that will arise  are all positive. Also the prevailing financial state that is existing in the marketplace at the time you are seeking your loan, will have quite an impact on what the terms to the loan you receive will be.

This is where your team of Professionals will come into play. They, because of their differing expertise, can help you to obtain a better loan. In some instances the language spoken by your lenders might be sounding all Greek to you.  Mistakes that might have slipped by will be spotted and corrected because of the competence of those who are offering some guidance to you. Without this team that you have assembled you might spend a lot more than is necessary and you will also save a lot more than you ever will without them.

If you have decided what your next move will be, then  give me a call and I will be most happy to assist you with obtaining the funding for your Business project. You can also download a Loan Application from this website or get an open offer from a lender by simply clicking the link below.

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