Any property designed or zoned for commercial use is a commercial property and may require a commercial property loan in order to acquire, redevelop, and/or to refinance it. The properties this may include are retail buildings, office buildings, industrial complexes and sometimes even apartment complexes.
It is important to know how a commercial property loan is similar to a personal and how it is different. The first and most important difference is that commercial property loans are made to a business. It is completely possible for an individual to have bad credit but for their business to have outstanding credit. An unresolved student loan or defaulting on a mortgage will reflect an individual’s credit, but unless that loan was granted under the name of a business, the deficit will not be reflected on the business’ credit.
In the case of a business with no credit or bad credit, a private individual, usually the owner, CEO or other individual with a vested interest in the company may be required to sign off on the loan. If the business defaults on the loan, this individual(s) then becomes financially responsible for repayment. Some lenders do not require a co-signer in this manner, but defaulting on the loan will mean the transference of the property to the lender. This latter type of loan is known as a non-recourse loan.
There are different loan repayment options with a commercial property loan then there are with loans such as a private mortgage. A homeowner may have options such as 15 or 30-year repayments with varying interest rates. A commercial property loan usually requires a full loan repayment within five years or up to 20 years. There is usually an amortization period where monthly payments are made, then at the end of the life of the loan a balloon payment, which is the total remainder left on the loan, is paid. With either type of loan, a longer repayment period equals a higher interest rate.
When an individual applies for a private mortgage loan, for example, they calculate their income and expenses to determine what amount they can afford to pay each month. When calculating the maximum amount of a commercial property loan to a business, a method called the Debt-Service Coverage Ratio (DSCR) is used. In layman’s terms, the amount of money a business generates from all sources is calculated. Operating costs are subtracted. This will include everything from the utilities bills to payroll. They are left with the annual net operating income. This annual net operating income is used to determine how much a business can pay annually and, therefore, determines the amount of the loan.
There are some terms a borrower should be familiar with before borrowing, the first of these is a lockout. If your business borrows $5,000,000 and has the ability to pay that amount back in the first year, a lockout prevents the commercial loan from being paid off before a specified period of time, usually five to ten years. If a loan is paid off before the length of the loan has ended but after the lockout period, there may be a Prepayment Penalty.
The important thing to remember about commercial loans, especially commercial property loans, is that they should never be used frivolously. Every business owner would love 20,000 sqm of space, but it is important to be realistic and to consider how the money will be used before even applying for a loan.
About the Author: Dominic Lambrinos
Dominic Lambrinos is a financial expert who provides professional business finance solutions, commercial financial engineering, expert review of financial submissions, negotiation, equity raising, business sales, and trade financing. Dominic is also a sought after finance business trainer, and accomplished public speaker.
Under Dominic’s guidance , his team can also prepare professional financial submissions, review financial statements, provide financial accounting, business administration, development of information systems, marketing and sales skills, computer and Internet sales skills.