April 5, 2014
Since the recession in 2008, it has been much more challenging to obtain a commercial loan. By late 2008, occupancy levels on multi-tenant real estate properties like office buildings and shopping centers started to drop dramatically in the United States. Lenders didn’t seem to know where the bottom would be on falling real estate prices and lower occupancies on commercial properties. Federal regulators went through the loan files with a fine-toothed comb, looking for any signs of insolvency on behalf of the borrowers, the business, or the property. Underwriting guidelines seemed to change almost weekly and were continually getting more stringent. It seemed like it was just easier for commercial lenders to say “NO.”
The good news is that times are better today. It’s still not easy to get a commercial loan, but at least underwriting criteria has stabilized and become consistent. There are three pre-qualifications for a commercial real estate loan: the quality of the income, the quality of the property, and the quality of the borrower. It’s important to be aware of all three of these pre-qualifications when applying for a commercial loan and to present each in the best light possible. Not meeting the standards for just one of them could kill the deal and waste your time, the realtor’s time, and the lender’s time.
Before the recession, the quality of the property income and the quality of the real estate were the most important to a commercial lender. After the recession, the quality of the borrower became the most important, so we will start there. At my companies, Apartment Loan Store and Business Loan Store, we use the following method and criteria to screen and package your commercial loan for success:
The Quality of the Borrower:
- Credit: You will need to have good credit (a score of 680 or above) with very few mortgage lates, no foreclosures, and no bankruptcies. If your credit score is closer to 660, and you can adequately explain the derogatory items, then there could still be some commercial loans for you. If your credit is poor, then get a partner who has good credit to be the key principal on the loan. Also, if you have a lot of credit card debt, try to consolidate it onto a home-equity line of credit, or pay it down before applying for your loan. Lenders view high consumer debt as a sign of poor business management and a high-risk borrower.
- Cash: Make sure you have enough cash (outside of retirement accounts) for the down payment (if it’s a purchase) and the post-closing liquidity requirement (amount you will need to still have in the bank after the loan closes). Ask the lender or mortgage broker ahead of time what these amounts need to be.
- Experience: Most commercial lenders today want you to have some experience owning and/or managing commercial real estate. If the commercial property is or will be occupied by your business, industry experience will be essential. If this is a commercial investment property loan that you are applying for and you do not have experience owning commercial real estate, sometimes telling the lender that you will be using professional management will mitigate this.
To find out more about this process, or to apply for a commercial loan with us, please visit https://apartmentloanstore.com/ or https://businessloanstore.com/. Also, there is a great webinar posted on “How to get a commercial loan during these tough economic times.”
By Terry Painter, President
Apartment Loan Store and Business Loan Store