The prohibitive rents are forcing business owners to consider buying their own commercial property. But what if there is no money for the purchase? The best option for you would be a commercial real estate loan. Let’s review the terms of lending, its advantages and disadvantages.

More about commercial real estate loans

What is a commercial real estate loan? This is the acquisition of non-residential premises on credit secured by property acquired by a businessman, or secured by premises owned by the borrower.

In order to get a commercial loan, entrepreneurs need to provide:

  • documents proving that the entrepreneur really has his/her own business;
  • papers that indicate the main activity of the small business owner.

However, due to the flaw in the legislation, some difficulties arise when purchasing commercial housing on credit. So, for example, there are many legislative acts on residential real estate. But there is not a single mention of commercial real estate. Therefore, with a mortgage loan of the latter type, the bank’s clients are forbidden to issue a mortgage on the purchased housing before the sale and purchase transaction is concluded. In other words, the financial organization issues funds for the purchase, then the buyer takes over the property, and then the pledge is issued. But between the issuance of borrowed funds and the registration of collateral for the bank, there are some risks, therefore, not every financial organization agrees to formalize a mortgage loan for a small business.

If we talk about the rest of the nuances, then a commercial real estate loan is similar to a targeted loan to buy a home. The program also provides for an initial payment, appraisal of premises and property insurance.

Features of a commercial real estate loan

Features and benefits of a commercial real estate loan:

  • interest rates may exceed the rates established for credit programs for the purchase of residential properties;
  • for the purchase of the commercial real estate, you may require registration of different types of insurance;
  • there are different options for an initial payment – in cash or in the form of a pledge of another real estate that the borrower has;
  • different collateral options for a loan are allowed – a pledge of the acquired real estate, guarantees of guarantee funds, corporations for the development of small and medium-sized businesses;
  • a property appraisal is optional;
  • alteration, re-equipment and modernization of the ac-quired premises and structures is allowed.

Thus, a commercial real estate loan has a more flexible framework for registration in terms of providing collateral and initial payment, and also gives more freedom in the disposal of real estate purchased on credit, allows it to improve and significantly modify to fit your business goals.

What do banks offer?

The loan product is issued on the following conditions:

  • money is issued only for the purchase of commercial real estate;
  • average rates range from 3.14% to 11.72%;
  • amounts range from $1 million and $5 million;
  • additional funds can be obtained for real estate renovation;
  • you can get a loan extension;
  • you do not need to make an initial payment.

The loan program allows you to buy not only commercial real estate, but also to make repairs on the premises, purchase special equipment, modernize equipment, or even buy a ready-made business. The bank also has a refinancing program that allows you to pay off debts for commercial real estate to other banks.

The procedure for obtaining a commercial real estate loan

According to the requirements of the legislation, a pledge burden on a commercial mortgage object can be imposed only after the transfer of ownership to it to the buyer. Such a period of time for the bank is a risk zone. In order not to lose their money, lending organizations use various schemes. First of all, we are talking about the possibility of obtaining a mortgage with a down payment and without it. If there is an initial payment, the borrower can be offered at least three options for the organization:

  • Execute a purchase and sale agreement, deposit the initial amount, receive a guarantee from the bank to transfer the rest of the money to the seller after registering a pledge on real estate. In this case, a pledge agreement is concluded between the bank and the buyer of commercial real estate for the purchased object;
  • Pay the seller an initial installment and secure a bank guarantee to receive the rest of the amount after the pledge is made. In this case, the acquired object is transferred as a pledge of the credit institution, the change of ownership is registered and a purchase and sale agreement is drawn up;
  • Register a legal entity and receive a commercial object in its ownership, as well as credit funds from a bank and redeem the right to own this legal entity.
  • Next, the buyer pays off the loan and registers the property for him-/herself.

A commercial real estate loan without a down payment is a rare occurrence. It may be relevant in case of purchasing real estate of the highest liquidity category. However, the absence of a requirement for an initial payment often indicates that the buyer will need to issue additional collateral for movable or other real estate or pay financial obligations as quickly as possible. That is, the conditions for the buyer will be unfavorable.

Thus, the process of obtaining a loan for commercial real estate has its own specific features. This is primarily due to insufficient legislative regulation, and therefore the bank has the opportunity to organize a reliable process on its own. On the other hand, banks are constantly faced with the problem of confirming the reliability of the debtor, which forces them to complicate the schemes and thus reduce their risks. Despite this, the number of applications for commercial mortgages is constantly growing.

Which bank should you choose?

The choice of a particular financial institution will depend on what conditions you need. For example, if you need a minimum interest rate, then you can use the services of one financial company, but if you need a maximum loan amount, then another financial company will do. And of course, remember that the “more honest and transparent” your income, the lower the interest on the loan and the more the amount and term of payments.

In order to get as many chances as possible for a mortgage, you need to contact several financial institutions at once. This can be done, for example, using an online application. And of course, your chances of obtaining a loan will increase significantly if you have collateral or a guarantee.

Who can get a commercial real estate loan?

There are standard requirements for who can get a commercial real estate loan. As a rule, these are people 20-60 years old, whose business has existed for at least six months.

Cons of a loan for commercial real estate

This product has both advantages and disadvantages. So, for example, the following points can be attributed to the disadvantages:

  • in spite of the fact that a commercial real estate loan is similar to a loan for housing, it has a longer term and a loan decision is usually made within 5-7 days;
  • also, some financial organizations charge a commission of 1-2% for considering an application for this loan product;
  • unfortunately, this loan product is often issued only in large cities.

Benefits of a commercial real estate loan

Despite all the difficulties that entrepreneurs and legal entities may face when applying for a commercial mortgage, there are undeniable advantages of this loan option. They usually include:

  • ownership of non-residential premises;
  • independence from the rise in rental prices for commercial real estate;
  • the possibility of obtaining additional income from the provision of the acquired premises or part of it for use by other persons;
  • maintaining a high level of profitability of the company;
  • safety of equity capital in circulation (only a small part of equity is used to make an initial contribution). However, this condition applies only to those
  • companies whose profitability is higher than the cost of the loan;
  • the ability to expand your business at any time.

So the benefits are obvious. Moreover, it is worth considering that different banks provide different conditions for lending to legal entities, respectively, the requirements may be less and more profitable for each specific borrower.

A commercial mortgage gives a chance to legal entities and individual entrepreneurs to acquire real estate for doing business in a relatively short period of time and at a minimal cost. The rather tough general approach of banks to this type of lending is due to the high risks inherent in business mortgages. Despite this, each borrower can find the optimal package of conditions.