Purchasing real estate for the location of your business is a huge decision, and not one to take lightly. Before you become a commercial property owner, take time to find the right lender to work with you on your building purchase or construction financing.
Commercial real estate loans are very different than residential real estate lending. Financial institutions look at the financial stability of a commercial client with the business stability in mind, may require additional collateral, and assess risk on commercial lending differently.
Greater Portland has roughly 18 commercial lenders, each with unique portfolios and niches they prefer to work in. At Magnusson Balfour, one of our roles as Business and Commercial Brokers is to assist our clients in determining the best financial loan scenario for their business.
We know, by the very nature of our business, what interest rates are doing in the market, what a good interest rate and amortization schedule looks like for different industries, and we understand what lenders look for in terms of information and how they will review you as a client. The package we prepare for clients purchasing a commercial property can very much shape the perception of lenders because they know we have done a lot of due diligence up front regarding property details, comparable market analysis, and have prepared business asset lists such as inventories and equipment. We provide lenders with the research that helped us arrive at the purchase price, and hence they tend to feel more comfortable because they know you are working with a qualified real estate broker.
Getting Ready to Buy
Before you approach a lender, you need to get your paperwork in order. If you have an existing business, you will want to have all your financials for the last three years, as well as your personal financial information, organized. If you are looking to purchase a business, you will also need to have a completed Business Plan with two-year cash flow projection.
Before you are ready to complete any loan application, you will need:
- 3 years’ tax returns
- Personal financial statement
- P & S Agreement of the purchase property
- 3 years’ of the Seller’s financials
At Magnusson Balfour, one of the essential pieces of our work with a new client is to assemble a complete financial package that includes everything necessary to approach lenders. This way, when you are ready to make your purchase, getting financing will not be delayed due to lack of preparation.
Business and Commercial Broker, Craig Church, points out that one of the benefits of having a good broker working with you as you search for a commercial property for your business is the expertise that goes in to getting you ready to approach lenders. “The first thing we do is work with clients to define what they want to accomplish for their business in buying property. From that crucial piece, we can better help them find a lender who offers the right product at the best rates.”
“Just because you have a solid banking relationship with a financial institution, it doesn’t mean they will provide you the best opportunity for your business loan,” Church warns. Commercial lending is an entirely different department with a different staff of loan officers, and the process is very different. Also, all commercial lenders have specific portfolios they are working to build on, and what industries and levels of risk they consider. Smaller, local banks tend to lend more conservatively and make smaller investments, whereas large institutions have larger and more diverse portfolios. It is very necessary when it comes to a business loan that you shop around.
Choosing a Lender
One of the first things your real estate broker will do is assemble a financial package to present to multiple banks to get a Term Sheet from each. A Term Sheet is a non-binding document, prepared prior to formal underwriting of a commercial loan application, that outlines the terms and structure of a potential business loan by a lender. It delineates the interest rate associated to the length of the term of the loan, the amortization schedule, the commitment fees and costs of the loan, as well as the expectations of the bank such as the Loan to Value percentage, the down payment required, collateral required, etc.
With Term Sheets in hand from each potential lender, we work with you to determine the top 2-3 offers to consider. At this point, we advise clients to go meet with these best choices, and see which institution is the best fit for you.
Because banks retain commercial loans in-house (versus selling them on the secondary market as is customary with residential loans), you will have a long-term relationship with both the institution and likely the individual loan officer, so you want to make sure you feel comfortable with the relationship and confident in the institution.
If you don’t qualify for a “typical commercial loan” there are options for Bridge Loans, and seeking independent investors for your business venture. There are capital lending groups who will lend on a higher interest rate in cases of more unique businesses, to people who perhaps don’t have a great credit score, or those with minimal equity of their own to invest. These alternative loans can give you an opportunity to get off the ground, and establish a successful business. Once you have proven what you can do and that the business is sound, you can later approach a traditional lender and refinance. This may be an option to explore, and one to discuss with your business or commercial real estate broker.
The Bottom Line
Lenders are all about the numbers – they want to know that their investment is able to be paid for and that the collateral is there to back it up. Magnusson Balfour is very good at assisting clients, not only in determining a good buy for your business property, but in preparing you for finding the right lending situation.
Special thanks to Magnusson Balfour Brokers Craig Church and Raynor Large for the preparation of this article.