Procuring commercial real estate comes with many challenges, above and beyond choosing which investment suits you. While commercial real estate advisors guide the property search, other professional services are at play during the process. Perhaps one of the most important relationships a tenant needs to develop before making any type of purchase is the relationship with a banker.
A banker helps property owners/operators understand what their business can afford and creates guidelines within which future vendors, including your commercial real estate advisor, may operate.
Securing financing from a bank for a commercial real estate loan involves several steps. Here's a general guide on what companies typically need to do, provide, or discuss to ensure the process goes smoothly:
The first step in any significant financing decision should always be creating a relationship with your financing partner. Matthew Mapes from Bell Bank states,"Because of the continued impact of high-interest rates, banks have tightened their credit standards, often only lending to customers with an existing banking relationship. That makes it crucial for you to have a strong relationship with your bank already in place – your bank can act as your strategic adviser, offering their expertise and experience to help you through the process."
You can feel confident that bankers, just like commercial real estate advocates, want to help you find a solution that fits your goals and enables you to achieve strategic and financial success.
Tim Colquhoun, a National Bank of Arizona banker, states"Banks, now more than ever, are looking to support companies beyond just a transaction, so building that relationship with a banker/bank will give you the certainty of execution you need for your purchase and will add tremendous value to your business for the long term. A real estate purchase is more than just a one-off transaction for a business; it is the next step in their growth, and having great partners and a tailored approach will only help."
Once you've established a relationship, the following items may be discussed or requested from you before you embark on your property search:
Business Plan
You may be asked to prepare a detailed business plan that outlines your company's objectives, financial projections, and how the commercial real estate lease fits into your overall business strategy.
Financial Statements
To secure a loan, you'll need to provide up-to-date financial statements, including balance sheets, income statements, and cash flow statements. Banks will use this information to assess your company's financial health and ability to repay the loan.
Creditworthiness
Financial groups will assess your creditworthiness, so ensure your company has a solid credit score. Taking it one step further, according to Team Financial Group,"Commercial lenders may look at both your business and personal credit scores before they approve your application. If you have poor personal credit and wonder if it will affect your approval or the terms of your commercial loan, the answer is yes, it can."
Once you've decided on or narrowed down your commercial real estate options with your broker, your banker will be able to discuss the specifics of the loan, including:
Collateral
Depending on your business plan, financial statements, and creditworthiness, you may need to offer collateral to secure the loan. This could include the commercial property itself, other business assets, or personal assets of the business owners.
Down Payment
Be ready to make a down payment. Typically, banks require a percentage of the property's purchase price as a down payment. Southeast Bank states that"the average down payment on a commercial loan is between 10% and 30% of the property's equity".
Loan-to-Value Ratio
Understand the loan-to-value (LTV) ratio, which is the ratio of the loan amount to the property's appraised value. Banks often have maximum LTV ratios, so be aware of these limits. Lev Capital states,"Commercial loan LTV ratios fall between 65% and 80%".
Debt-Service Coverage Ratio (DSCR)
Banks may assess the DSCR, which measures the company's ability to cover its debt obligations. A higher DSCR is generally favorable.
Personal Guarantees
In some cases, banks may require personal guarantees from business owners, making them personally responsible for the loan if the business cannot repay. The business structure can influence the amount of liability.
It's important to note that the specific requirements may vary depending on the bank, the nature of the commercial real estate transaction, and the business's financial condition. Consulting with a financial advisor or loan officer at the bank can provide more tailored guidance based on your specific situation.
