Commercial Mortgages and Closing Costs
Take a look at the skyline of any major city in the United States and you’ll see the fruits of borrowed money. Most often, construction and all of the associated expenses require financing. Also, though, periodic improvements and renovations likewise call new liens to make such restoration affordable. Real estate investors and owners look to their real estate to provide income; borrowing the money helps to maintain a healthy cash flow despite the debt incurred. In the commercial mortgage world, the building is the breadwinner.
Commercial Real Estate Loan Basics
Whereas the typical residential mortgage is made to an individual or couple, commercial financing is usually extended to some form of business entity — partnership, limited liability company or corporation, e.g. In addition, home loans can be secured with as little as three percent equity in the property, sometimes zero for selected government-backed mortgages; commercial real estate loans rarely get approved by established lenders without at least 30 percent, and often up to 45 percent. The term of the loan also differs in most cases: a frequent home mortgage period is thirty years; for a commercial mortgage, regularly 20 years or fewer is common. Furthermore, commercial loans can amortize — like a traditional home mortgage – or they may also have interest-only payments.
How Are Commercial Property Loans Underwritten?
Again, it is helpful to compare and contrast commercial with home mortgages. The elements of home loan analysis are credit history; income and revenue; financial assets; and appraised value versus money down. Therefore, a lender wants to know that applicants pay their bills; earn enough money to make the house payments along with other obligations; have enough in reserve to continue paying should a job loss or other surprises occur, and bring enough of their own wealth to the table to incentivize continued remittances over the life of the loan.
In commercial lending, the property — the collateral — takes on more importance relative to the borrower. Though the building might be owner-occupied, it is primarily an investment property, whether it is an office building, industrial facility, or apartment complex. Therefore, the income it generates has an outsize effect on the probability of mortgage approval. Underwriters, then, seek to verify not only an acceptable level of property income but also establish a degree of confidence that the revenue is dependable. This necessitates an analysis of:
occupied units versus vacant ones
terms of the current leases in place
expenses related to administration and maintenance
other liens or debts related to the property
In short, can the property produce enough revenue to meet its operating expenses and financial obligations along with the new mortgage? Underwriting/processing fees related to this investigation can run between $500 and $2,500.
What Evidence Must the Borrowers Supply?
As with a consumer mortgage application, commercial real estate loan information needs to be verified. Let’s begin with borrower information. Commercial lending institutions need information on the business entity making the application(which is often much simpler than that of a conventional mortgage). Depending on the structure of the entity, a lender may ask for basic documents and information:
Articles of Incorporation
Proof of funds for the down payment
The address of the property
A copy of your credit report
A copy of your identification
Also, private lenders may ask one or more of the owners to apply, not as a borrower, but as a personal guarantor. The guarantor serves as a type of co-signer, accepting responsibility for the loan if the business is unable to continue making payments. Unlike a traditional co-signer, the guarantor’s name does not appear on the title to the property. Documentation relative to this person might include those items submitted by residential borrowers:
Credit report, which will cost between $100 and $1,000
Personal tax returns
Proof of identification
Bank statements and other asset verifications
As the centerpiece of the loan transaction, the property undergoes intense scrutiny by underwriters seeking to quantify its capacity to generate income. The appraisal is a crucial component in that effort.
The appraisal is important for commercial buildings for myriad reasons. Not only does it aid the underwriter in establishing the value of the collateral, it also keeps landlords honest when assessing rents on various units. When businesses dissolve, a comprehensive appraisal helps in the division of assets among owners. Moreover, owners who wish to appeal property taxes need an authoritative estimate of the property’s worth. Among the distinctive characteristics of a commercial appraisal are four areas of focus: 1) the abundance or lack of nearby properties that match the intended use, 2) utility, i.e. how well the subject property fulfills its intended use, 3) market demand for such properties, and 4) the ability of interested buyers to afford them, sometimes referred to as effective purchasing power. These factors are measured against one another to calculate a reasonable valuation. Given the complexity and time invested, a commercial appraisal can cost up to $10,000.
Other Building Verifications
Units must generate revenue and underwriter confidence rises when that revenue is assured over time. This is why leases are requested from commercial borrowers. Beyond rental agreements, however, is the certified rent roll which helps lenders determine the net operating income and internal rate of return, for example. This document contains specific information on each unit (e.g. square footage, number of rooms) and occupant (names, amount of rent paid, deposits held, lease end date). Clearly, too many vacancies can sink a commercial application. Yet, even 100 percent occupancy does not build underwriter confidence if each tenant is there on a month-to-month basis. Finally, banks can require tenant confirmation of the terms of their leases, verifications known as tenant estoppel. And lets not forget about Property taxes and government fees, more info can be found on this article
Additional Service Charges
Building inspections must be conducted at three to 10 cents per square foot. Likewise, initial environmental clearances charge $2,000 to $6,000. Meanwhile, title agencies may require $2,500-$15,000 to verify and insure ownership. Lenders and brokers may take origination fees of two percent of the loan amount. Finally, attorneys — for borrowers and lenders — will also bill for their services.
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