The primary purpose of a commercial mortgage is to help small business owners add “property owner” to their titles. This accomplishment is worthwhile, as it negates the need for you to pay rent to someone else. As a wise person once said, “Paying rent is like throwing your dollars into a bottomless void.”
When you own a property, your payments build in a way that gives you positive options in the future. You’ll have more control of the property, build your retirement portfolio, and create the opportunity to collect rent from others.
A commercial mortgage can be used for many kinds of property, including warehouses, offices, apartment complexes, stores, and restaurants. And the scope extends beyond just purchasing a property. You can also use this type of financing for new construction, renovating an outdated structure, removing yourself from a lease, or refinancing for a better repayment term.
Regardless of the details, these projects typically require financing that can help you convert your equity into cash.
“Commercial real estate isn’t cheap,” say the entrepreneurial experts from Small Biz Rising. “If you’re a small business owner who’s considering buying or further developing commercial real estate—whether that’s an office building, a shopping center, a hotel, or another business-related property—odds are you’ll need to secure financing from an outside lender. In most scenarios, that usually means applying for a commercial mortgage loan.”
In the financing world, there’s a spectrum of difficulty when it comes to qualifying for and obtaining various loan products. The good news is that commercial mortgages fall on the easier side of things. While SBA loans require piles of paperwork and have strict requirements, a commercial mortgage is a much smoother ride.
One of the main reasons for this ease is that you will secure the loan by using the property as collateral. As long as the property’s value appraises for a sufficient amount, you’ll bypass some of the hurdles associated with typical loans.
However, a commercial mortgage isn’t always a sure thing. Small business loans are always competitive, with lenders looking at a variety of factors before making approval decisions. What’s important is that you provide all the relevant documents, including property blueprints, purchase contracts, scope of work analysis, project budget, and a property market analysis.
Beyond the nuts and bolts of the real estate project, your finances will play a role in the approval decision. So don’t put too much emphasis on the property and lose track of the business side of the equation.
“You’ll need to gather an assortment of documents, including current business and personal tax returns, business-related financial records, personal and business credit score information, bank statements for personal and business accounts, asset and liability statements, profiles of business partners and directors, business plans, and possibly more, depending on the lender,” says Small Biz Rising.
While we’re on the topic of what you need for a commercial mortgage, here are 10 more considerations. Some are major details and others are fairly minor, but they combine to make your application more desirable to a lender.
These loans are big.
Real estate isn’t cheap, so your commercial mortgage will pack a punch. At their smallest, you’ll find amounts around $250,000. But the maximum can go up to $5,000,000 to fund larger projects.
Interest rates are favorable.
With your property serving as collateral to secure the loan, lenders will often feel comfortable offering you interest rates as low as 4.25%.
Repayment terms are also favorable.
Real estate projects are rarely quick. Luckily, neither are the repayment terms. Don’t be surprised to find terms extending up to 25 years.
Your plan can really open doors.
Business plans are always important when seeking financing, but they take on a whole new level of importance with commercial mortgages. Take the time to make sure yours clearly demonstrates your expertise and investment in the project.
Being an owner means added responsibility.
Remember that owning property means you’re responsible for the maintenance. And as sure as the sun will rise, issues will arise. It’s wise to account for upkeep expenses as you budget for your project.
Your business structure matters.
Sole proprietorships can be a solid structure for a business, but not when you’re seeking a commercial mortgage. It’s best for you to form a business with limited liability, such as a limited partnership, LLC, S, or C corporation.
Your past transactions are relevant.
Lenders will look beyond the real estate project to assess how likely you are to fulfill your repayment obligations. Plan on them evaluating your personal finances.
You need to be the majority in the property.
While commercial mortgages are versatile, they still have their limits. For example, you will need to occupy the majority of the building in order to qualify. Even occupying 50% isn’t enough.
Pay attention to the LTV.
Lenders will want you to put up a substantial amount in conjunction with any loan. A common range for the maximum loan-to-value ratio is 65-75%.
These loans can move slowly.
It’s true that commercial mortgage applications are easier than many other types of financing, but that doesn’t mean it’s always a walk in the park. In some cases, it can take a few months for one of these loans to fund.
Construction projects often boil down to a vast array of details. When you pay attention to the nuances and carefully manage your operations, you set yourself up for sustainable success.
On the other hand, if you neglect the smaller aspects of your project, the consequences can be swift. For this reason, take the time up front to organize yourself before you begin any applications. By getting your house in order first, you’ll be in a prime position to smoothly navigate the application process that follows.
Most importantly, this preparation and organization will shine through in your application. And robust business plans and comprehensive applications are proven to work wonders as lenders make their approval decisions.
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on Lendio.com, FitSmallBusiness.com, and ModernHealthcare.com. Grant is also the author of the book “Rhino Trouble.” He has a B.A. in English from Brigham Young University.