When it comes to Commercial Real Estate is vital to understand that this lending process is one that works differently than most others. In the Post-Covid environment, lenders are being more selective about the deals they underwrite and there is much more scrutiny in the diligence process. This includes understanding your relationship with your bank, your company’s financial profitability, a principal’s personal financial creditworthiness, and the ability to access other sources of capital. In addition, lenders are looking for more investor equity in deals to reduce their lending risk. Investors’ past financing history and performance will be important to getting a loan approved. Therefore, it is important to be educated about what lenders are looking for in order to best prepare yourself for the underwriting process.
You may also be asking yourself, what the different types of commercial property loans are.
Traditionally, the first place most investors go for financing commercial real estate are their bank. This is because it is the most affordable product compared to other sources of CRE debt although usually the most difficult to qualify. Life insurance companies will also typically provide low-leverage loans on properties that have very stable cash flow. The downside to utilizing this kind of loan is that they are usually less flexible than bank loans. One may also consider Agency Loans issued through and backed by government agencies such as HUD, SBA, or USDA Government-sponsored enterprises, as they will hold you to certain standards and if you meet those specific requirements your loan can be guaranteed. This makes it easier to get through a bank underwriting process. CMBS Loans (Commercial Mortgage Backed Security Loans), are structured through a conduit, or a larger bank. This bank will go out and make loans, then package them up and send them off to the public as bonds. This option for lending leaves you with little to no flexibility and in the current environment there are very few lenders originating CMBS loans.
All things considered, financing is one of the most critical components of closing a successful commercial real estate deal. Stay tuned for our Pro’s and Con’s blog series where we will detail each financing option. At Business Lending Partners, we continue to strive to educate the investor so that they understand their options and can better control their financial future.
