Don’t Wait – Get Ready NOW!
The New Year will be here before you know it. Do you have big commercial real estate plans for your business in 2018? Have you outgrown you space or are you a first-time investor getting ready to take the plunge in the New Year? It might be a good idea to get a jump on the financial piece of your business dreams now.
Let’s Talk Financial Requirements to Purchase
Of course, the main thing commercial real estate lenders want to know about you is, as the borrower are you able to repay the loan. That’s no different than a residential mortgage lender, right?
However, unlike residential mortgages, government agencies do not back the loans. The interest rates are typically higher and the term is usually 5-20 years versus 15-, 25-, and 30-year residential mortgages.
Starting a new business with no credit history? Usually the lender will require a personal guarantee from each of the principles. Oh yeah, be sure to outline any contingencies involved in your purchase such as needing to sell or lease your existing property.
In order to be ready to purchase commercial real estate in the Raleigh area, it’s good to be prepared with all the documentation your lender will need, including proof of funds for the down payment. In a seller’s market, it gives you an edge when making an offer to have your financial “ducks in a row.” So be prepared when you meet with your lender. You’ll get that all important Pre-qualification Letter sooner and be ready to start your search for just the right property.
To get your Pre-qualification Letter, commercial lenders will look at loan-to-value ratios (LTV), which involves comparing the loan amount to the appraised or purchase price. Typically if the LTV is somewhere between 65% and 80%, you’re good. Of course, 65% is usually going to get you a better interest rate than 80%.
Lenders also want to know that the business has sufficient cash flow to service the mortgage debt. They do this by looking at the debt-service coverage ratio (DSCR). This is a comparison of the annual net operating income of the business and the annual mortgage debt principal and interest. They’re usually looking for at least a healthy 1.25 ratio as proof of ample cash flow.
Leasing? What Does a Landlord Want to See?
What if leasing makes more sense for your business at this juncture? Well, your potential landlord will require some financial documentation as well. For a new business lease the landlord could require:
- your current business plan
- 2 years of personal tax returns
- 2 mos. of current personal bank statements
- up-to-date credit report
- may require a personal guarantee of the lease amount
If your business has a more established lease history, landlords may want
- to make sure they are dealing with the primary decision maker
- possibly see 2 years of business tax returns
- 2 months of current business bank statements
- a current profit and loss statement
Here’s a handy checklist providing the financial requirements you will need whether you are purchasing or leasing commercial real estate.
Partner with the Professionals at Craft Commercial
Trust the seasoned professionals at Craft Commercial to help you successfully navigate the journey of purchasing or leasing commercial real estate including the financial requirements. With our market knowledge and industry connections, we can be your reliable partner in any commercial real estate transaction. Contact us at 919-446-5000 or firstname.lastname@example.org.