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Commercial Real Estate
When a business is ready to expand, renovate, or refinance real estate, the venture requires substantial cash on hand. It’s not always easy to generate the cost of a new building or adding onto an existing one without the help of a real estate loan. In most cases, the loan is secured on the value of the proposed real estate, limiting risk for the lender. Commercial real estate includes any building used solely for business such as a manufacturing facility, warehouse, shopping center or multi-family housing development.
OVERVIEW
Once your business is saving money by owning your retail location, or a rental building has been filled with tenants and cash from the rentals begins to come in, it’s easy to see the benefits of owning commercial real estate. In order to get there, however, a lot of risks have to be taken along the way. The right plans must be put in place to ensure the success of the investment.
The same goes for the real estate’s financial picture. The right loans, the right lenders, and the best loan terms will help complete the picture of success. That’s why it pays to take the time to learn what options are available and to fully understand the terms and conditions associated with your Commercial Real Estate loan.
An amortization period is the length of time payments are due on the loan. They’re calculated so that the payments go mostly toward interest in the beginning and more toward the principal as the loan matures. This is a typical model for commercial real estate loans.
The interest rate on a commercial real estate loan can vary depending on several factors: the borrower’s credit history, the length of the loan term, and the business’s Debt-Service Coverage Ratio, or DSCR. This is the ratio of net operating income to annual debt service.
LOAN HIGHLIGHTS
Loans are designed for income-producing real estate investments such as storefronts, manufacturing facilities, restaurants and multi-family residential properties among others.
Amortization periods can be anywhere from five to twenty years.
Most loan-to-value ratios are calculated in the range of 65% to 80%.
Lenders typically want a DSCR of 1.25 or better.
PROS
- These loans help cover the immense costs associated with commercial real estate.
- Proper satisfaction of the loan can help to build a strong credit history.
- CRE loans have many options when it comes to the terms so many businesses can successfully find the right lender with the help of a loan broker.
CONS
- It can be hard to qualify for a commercial real estate loan.
- If finances or the economy take down turn a downturn, it may be less possible to negotiate repayment than it would be to renegotiate rent.
- Most lenders want substantial documentation.