Commercial Real Estate Loans
Loans for commercial real estate refer to credit made exclusively to finance or refinance commercial property.
Commercial real estate (CRE), with very few exceptions, is anything constructed on land with a commercial zoning designation, such as a light industrial warehouse, an office building, or a retail establishment. Multifamily assets, such as apartment buildings, are the most obvious example; though they can be constructed under either residential or mixed-use zoning, they are underwritten as commercial financing.
All CRE loans have one thing in common: the actual property is used as collateral to secure credit exposure.
Commercial Real Estate Loan Requirements
Loan approval for commercial property is considerably different than for residential property. Lenders want to be sure that your firm can afford the loan payments because you’ll be using the property for commercial purposes and paying the loan back with business revenue.
There are three primary categories required for Commercial Real Estate Financing:
Security
Your lender will want to be sure that the property you are borrowing against is sufficient & secure before approving a loan. So, to qualify, you will often need between 25% and 30% equity in the property you wish to purchase.
Additionally, your lender will want to confirm that you have sufficient property insurance to guard against property damage (their collateral). To ensure no outstanding liens or other claims against the property, the lender will perform title work on the property.
Finances/Income
Lenders want to see that you have a lot of income compared to your expenses when processing your application so they can be sure you can afford to pay your loan each month. Your debt service coverage ratio is one factor that lenders consider while making this determination (DSCR). Depending on the asset you are borrowing against, the minimum DSCR varies, although most lenders would like to see a DSCR of 1.20 or greater.
Since you’ll be borrowing the money for business purposes you will need to provide your lender with tax returns to prove up income. Usually personal and business returns are required.
Credit
Your lender will look at your credit report as well. Lenders also require a personal guarantee for loan carve outs such as payment of real estate taxes and environmental indemnities among others.
Lenders will want to know how long you have been in business as part of their evaluation. The lender usually relies on the revenue your commercial property generates which will serve as the primary source of repayment the loan.
