Securing a commercial loan is challenging, but knowing the common roadblocks you will face ahead of time will make your experience smoother. Let’s explore some of the common issues that you will face; some of them you create on your own and others that are unique to dealing with commercial mortgage lenders.
When you apply for a commercial mortgage, lenders sometimes appear to go too far in asking for documentation.
Largely, this occurs because of the numerous regulations that have been put into place to ensure the commercial loan market does not suffer the same fate as the home mortgage markets.
Lenders typically go overboard; they want to make sure they have covered all bases. In fact, commercial lenders today, as many of us have discovered, seem to be looking for ways to reject a loan application, versus approving one.
While most banks who make residential mortgages have very specific requirements that are easy to determine, commercial mortgage lenders are not quite as transparent.
There is currently not an “industry” standard about what paperwork should be required, how interest rates should be quoted, or what loan programs are available. This lack of transparency means, as investors, we often must spend far more time finding the right lender for our commercial property.
Because commercial lenders are not as transparent, and many of them seem to be far pickier about the details of the loan, it is important you do your homework before you agree to a commercial mortgage deal. Make sure you understand the restrictions, terms, and costs associated with the loan.
Lender Restrictions on Property
Another common challenge you will face in finding a lender is the various restrictions commercial lenders will place on you.
Some lenders will only loan in specific geographic areas, others place serious restrictions on the amount of money they will loan you on a single property and still others place restrictions on how your assets are allocated before, during, and after the loan.
The bigger problem with this is because commercial lenders are not good at communicating this information, you could spend weeks, or months on presentations, only to find out your proposal is not working for the lender. This can cause serious time delays and leave you feeling frustrated.
Commercial Lenders Lack Resources
One of the biggest challenges you will face is finding someone who works for the lender to help you with the process. This is largely because most commercial lenders have a limited number of offices, and limited staff.
This makes it more challenging for you to find someone who has deep knowledge of the lender’s processes to help you with your loan.
Naturally, it would be disingenuous to identify the issues on the lender side when we, as borrowers, also create some of our own problems.
The Under Prepared Borrower
Perhaps one of the most significant mistakes we make as commercial mortgage borrowers is being underprepared.
Without the proper financials, the appropriate paperwork and a thorough accounting on the commercial property to be financed, it will be next to impossible to get a commercial mortgage.
As buyers, or owners of commercial properties, it is largely up to us to make sure we provide the right information to the lender, and to make sure we follow up immediately when a lender makes a request.
It is understandable when we, as property owners, or investors, do not always have the necessary acumen to deal with the variety of issues which occur when purchasing property, dealing with lenders, and creating the appropriate financial documentation.
Therefore, it is important for us to have a skilled professional working on our behalf. Financial advisors, attorneys, tax professionals, and others are not merely “window dressing” they can be valuable partners in our commercial mortgage endeavors.
The Overly-Optimistic Borrower
Let’s face it, in most cases, we are our own best cheerleader.
However, when we are developing pro forma statements or making other income projections about our commercial properties, a dose of reality is in order.
Before you start the pro forma process, make sure you obtain the appropriate information; get the past rental history, make sure you know what your average vacancy rate is, and find out the other costs associated with the property including taxes, insurance, and maintenance. We could save ourselves a lot of problems obtaining a loan if we approach the process with our eyes wide open.
The Borderline Borrower
While the lender will loan money based on the value of the property, they need to protect themselves from default. This means one of the factors they will be looking at is our reserves.
Borrowers must be liquid enough to withstand a decrease in rental income from their commercial properties or lender are likely to reject a loan application; the last thing they want is a borrower who cannot meet their obligations.
The Obstinate Borrower
We all want the best possible terms for our loan. However, if we dig in our heels and insist on terms the lender is not prone to approving, we are doomed to fail in our efforts to secure financing.
One must be realistic about what is possible.
Lenders put restrictions on loan amounts, geographical locations, and more. Make sure your demands and the terms you are seeking are in line with acceptable industry standards.
Yes, Like It Or Not, Timing Matters
We are currently in a market where interest rates are rising, lenders are being stricter about loan to value ratios, and credit scores are playing a bigger role in loan approvals.
Sometimes, the timing of our loan application is just bad.
Oftentimes, these are issues that are out of our control, but in some cases, we create our own problems with loan applications.
When signing a purchase and sale agreement for a commercial property, make sure you have realistic expectations about the closing dates.
Since most contracts have a clause regarding timing, make sure you are not boxing yourself into a time period that is unrealistic. While it is common for a residential mortgage to close in 30 – 60 days, this is unrealistic for a commercial loan. 90-120 days is more the norm.
TL;DR: Identifying And Overcoming Hurdles
One of the most important things you should understand as a potential commercial real estate buyer is the hurdles you will face.
These hurdles will come from lenders, but there are issues you, as a borrower can be responsible for and should be aware of them as well. Some of these issues include:
From the lender side:
- Understanding lender requirements
- Understanding lender restrictions
- Understanding lender processing capability
From the borrower side:
- Being prepared is important
- Being realistic about property expenses
- Understanding credit standing
- Being flexible about lender restrictions
- Understanding commercial mortgage market forces
Just because there are hurdles to overcome does not mean getting a commercial mortgage is impossible. In fact, Raisal can help; we put your loan request in front of the right lenders in our network, to get you the best solution to your commercial mortgage needs, in less time than you could do it on your own.