Commercial Lenders

Archive for January, 2011

Commercial Loan Interest Rates – Why So High?

January 29th, 2011

The first time you apply for a commercial loan, there will be a number of things that surprise you. For instance, why are commercial loan interest rates so high?

Let’s picture a basic scenario in modern life here in the United States. You decide you want to buy a home. You find one you like and come in to apply for a loan. I, the banker, congratulate you on being approved and ask you to come in and sign the loan documents. You come in, sit down and see a 9 percent interest rate listed. That is going to be a shock and rightly so. Personal residential real estate interest rates are typically much lower that that by a factor of 50 percent. This means nothing when it comes to commercial loans.

Commercial loan interest rates are going to be much higher than personal loan rates. You need to come to grips with this and include this factor as part of your overall funding scenario. Why are the rates higher? The answer is simple. The risk is higher. Let’s look at a simple example. Let’s assume I am a banker. You apply for a home loan. What is the risk? The risk is you default on the loan and I am left with the house. I don’t want the house, but at least it is there and some day I can sell it to liquidate part of my loss. The loan on the house is also for a manageable amount of money, so we are not talking about the end of the world here.

Now, let’s assume you come to me with an application for a loan on an apartment complex. It is a larger complex and you are seeking $20 million in funding. The risk level with this type of loan is much higher for two reasons. First, we are talking about a much larger figure, which means a default is going to be much more damaging to my banking portfolio. Second, the value of the apartment complex is in its net income produced by tenants. If vacancy rates go up, the area becomes undesirable or whatever, you could default. I would get the apartment complex, but selling it is going to be a long and difficult process if it is operating at a net loss. I am also going to have to pay for the upkeep throughout the time I own it as well as property taxes and so on. In short, it will be a nightmare.

The risk factor with commercial loans is much higher than it is with individual personal loans. That is just the way the finance system works. Given this, the lenders are going to seek additional profit from borrowers to offset the more significant risk they are taking on when agreeing to fund the loan. This is why commercial loan interest rates are higher and will always be higher.

By: Thomas Ajava

About the Author:

Thomas Ajava writes for CommercialFinanceLenders.com – independent commercial finance lenders.

No comments »

Posted in Articles

Tags: Residential Real Estate

Why Commercial Mortgage Lenders Don’t Like Small Loans

January 29th, 2011

Many of the most successful and powerful commercial mortgage lenders, as-well-as top commercial mortgage brokers avoid originating small balance loans. It is not easy to find a firm willing to underwrite a commercial mortgage with a loan amount of less than $1,000,000.00. As a borrower in need of a smaller loan, you may feel somewhat insulted by this circumstance, but if you take a moment to see things from the lenders point-of-view you will learn the key to getting your small balance loan through to closing.

All the Work 10% of the Pay

A borrower is entitled to all due respect and a high level of service regardless of the size of the loan being requested. It is only right that every client receive the same time and attention as every other. The small borrower asks the same questions as the large. The paperwork and documentation for a $100,000.00 loan is identical to that of a $1,000,000.00 loan. The only real difference is the number of zeros on the application.

As-far-as the lender is concerned, the amount of work and the effort involved in closing a small loan is exactly the same as closing a big one, but the compensation to the firm can be 10 times less! So for the company funding the loan, it’s simply a matter of economics; they can fund 10 loans for a certain amount of income or fund just 1 for the same amount of income. They will, invariably, choose to fund fewer loans with larger balances if they are successful enough to be choosey.

What’s a Small Commercial Real Estate Investor to do?

Even in this era of skyrocketing real estate values in the commercial sector there are still many, many buildings and building lots selling for less than $1,000,000.00. Knowing that lenders prefer large loans, how can a small investor get a low balance loan file through to close?

Small Balance Lending is a Niche

Some savvy business people have figured out that there is much less competition for small loans than for the big ones that everyone seems to fight over. Seek out small balance specialists. Sift through all the advertisements and all the search engine results and you will eventually find a lender looking for you just like you are looking for them.

Every time you get a lender or broker that tells you “We don’t do loans under a million” just take the time to ask: “Do you know any good lenders who do?” You will get some good leads and if your deal is of high quality you will find someone to fund it.

Make it Easy for Them

Remember, the reason a big lender doesn’t want your small balance loan is because they think it’s going to be a-lot of work for a little pay. Turn the equation around on them, make your loan look like easy and they will see a decent payday for a minimal effort.

Do some research and have the documentation you know you’ll need readily available and let them know you will be very forthcoming. Don’t just submit an application, sell them your deal. If you have great credit, make sure they know it up-front. If you are putting down a healthy down payment, highlight that fact. If there’s ton’s of equity in your building point it out to them. If they believe your loan will sail through the system they won’t be able to resist originating it.

Small commercial loans can be done. A little searching will turn up willing lenders, I promise. And, a little window dressing (as long as it’s honest) on your file will go a long way in getting it accepted.

By: Glenn Fydenkevez

About the Author:

MasterPlan Capital offers a wide range of private and conventional commercial real estate mortgage programs. Apply online at http://www.masterplancapital.com/
All inquires receive prompt and professional attention.

MasterPlan Capital is a dynamic, privately held, commercial real estate investment banking firm. Glenn Fydenkevez, the President of the firm can be reached via e-mail at glenn.fydenkevez@masterplancapital.com

No comments »

Posted in Articles

Tags: Niche

Commercial Property Loan – How To Get It Approved?

January 29th, 2011

When you invest in a piece of commercial estate, you generally have to take out a mortgage to pay off the cost, just like with a residential purchase. Yet, the factors determining whether or not you will be approved for an investment property loan are somewhat different and the requirements are more demanding. Commercial mortgage lenders will look at several financial aspects including a property appraisal, a credit check, the down payment, and the Debt Service Coverage Ratio.

A property appraisal is required to determine the market value of the commercial building and accompanying land. The appraisal keeps the lender from inadvertently loaning you more money than the real estate is worth, thereby reducing the risk of loss for the lender. Appraisals are also conducted during residential home purchases, but the price-deciding factors are different. A commercial property’s value is based not only on the condition of the roof, the plumbing, and other systems, but also on the size, location, and accessibility of the place.

With an investment property mortgage loan, you will also need to demonstrate a good credit record. Of course good credit is a plus in residential mortgages, but because commercial properties generally cost much more than the residential properties, the credit requirements tend to be more stringent. In addition, checking your credit history and score, lenders will want plenty of income and asset documentation to make sure you will be able to make your mortgage payments. If it is your own business that will occupy the business space, the lender will want the proof of the profitability of your venture.

Down payments are another determining factor in whether or not you will be approved for a commercial property loan. In the residential world, borrowers can often get away by contributing very little and sometimes even nothing up front in the form of a down payment. The big price tags on official and business properties, however, makes lenders very cautious as the risks are much greater. Large down payments are usually required for an investment property mortgage loan, with the minimum being 20 percent of the price. In many cases though, the average seems to be a down payment of 30 to 45 percent. You are then provided with the loan of the remaining amount of the purchase price. The amount you are loaned compared to the actual price is called the Loan to Value ratio (LTV) and is a very commonly used percentage in the mortgage world.

Finally, you will be approved for a mortgage based on the Debt Service Coverage Ratio (DSCR) of the commercial real estate. This is the amount of money the realty generates each month from rents and other fees (the net cash flow) versus the amount of the monthly mortgage payment (the debt service.) This ratio helps lenders to determine how much you can reasonably afford to pay on your commercial property loan each month. Most like to keep the ratio between 1.1 and 1.4. A ratio of 1.4 means that for every dollar you pay in mortgage payments, your property should be generating $1.40. Your revenue would therefore be larger than your debts, and you would theoretically be able to repay your loan.

Certain commercial lenders may have additional loan requirements, which are not listed here, but the basics remain the same for all. Be sure to shop around and ask each lender how he or she determines its approval. You can be competitive in the commercial property loan market by doing your homework and coming fully prepared to the negotiating table.

By: Andrew Stratton

About the Author:

Acquiring commercial property loan is not an easy task as there are many stringent and basic requirements to be fulfilled prior approval. For detailed information on investment property loan and lucrative commercial property dealings, you can visit, http://www.kiscl.com.