Expanding your business or starting a new real estate project is a significant financial endeavor for most companies. These investments require a lot of money, and the most viable financial solution is a commercial real estate loan. Essentially, this type of loan is similar to a residential mortgage but designed specifically for business property. Of course, there are significant differences between these two financial products. Your business’s access to a real estate development loan depends on various factors. Let’s take a closer look and see what lenders look for:
Getting A Real Estate Development Loan
These loans are typically used to buy, build, expand, or renovate a commercial property. This includes warehouses, office buildings, manufacturing facilities, laboratories, but also hotels, restaurants, retail spaces, and other commercial buildings. Most lenders require that the property is owner-occupied (the business has to occupy at least 51 percent of the building) and have multiple other financial requirements.
Business Finances
Your company’s finances are very important if you want to get approved for a real estate development loan. Most small businesses are considered high-risk by lenders and investing in real estate requires a lot of money. Essentially, lenders look at your books to see whether you have the required cash flow to repay the loan. They will calculate your company’s debt service coverage ratio, which is obtained by dividing your annual net operating income by your annual total debt service. You have to get a ratio of at least 1.25 percent to have a better chance of approval. For example, if you want a commercial loan of $1,000,000, your company has to have a net operating income of at least $1,250,000.
Business Credit
Lenders will also check your business credit score to determine what interest rates, payback periods, and down payments are ideal for you. The minimum credit score is 155 for SBA 7(a) loans, but for other types of loans, it varies depending on the lender. Your company has to be structured as a business entity, such as a limited liability company or an S corporation, to be considered for a commercial real estate loan.
Personal Finances
Small businesses are usually controlled by an individual or a small group of individuals. Most lenders will pay attention to the personal financial situation of the owners of the business. They will likely check your credit scores and see whether you had negative financial events, like foreclosures, defaults, tax liens, or court judgments. If you have a low personal credit score, your chances of getting approved are lower.
Property Characteristics
Most lenders will use the new property as collateral, and the lender will have a lien on it. This will allow seizure if you fail to repay the loan on time. Remember that your company has to occupy at least 51 percent of the property.
Hard Money Loans
These loans consider only the property value, with almost no reference to the borrower’s creditworthiness. They are ideal for companies that don’t qualify for other commercial real estate loans.
Real estate development loans are the best financing tools for your next project. Do you want to learn more about commercial real estate loans? Contact Urban Bay Financial and check our complete financing tools for real estate developers!
Sources:
https://www.forbes.com/advisor/business-loans/commercial-business-loan/
