As businesses grow in success and vision they often seek to buy commercial property that will give them more control and stability for their business. As they investigate this possibility, we field many questions they have about the process and how the lending may differ from personal real estate loans. The following are five of the most common asked questions potential commercial buyers ask.
1. How much money will I need to put down?
Generally an owner/occupied property will require a minimum of 15% down. If it is not owner/occupied than there is a minimum of 25% required. Obviously, the more you put down the less you pay over time. If you do have the available cash but choose not to put it down on the loan; it would be wise to insure you are getting a good return on your money versus interest paid on the loan.
2. How much is the interest rate?
Many people, when they begin seeking a mortgage, become very focused on the interest rate. While this is an understandable thought process, looking for the lowest rate so the payout will be lower, is not always the right focus. Commercial loans are often structured differently than personal loans. If you can only afford the payout on a 4% loan and not a 6% or 7% then you likely should not be purchasing the property. Most commercial loans are structured with adjustable rates. The banks loan money from their existing capital and the invested monies of their depositors. Since the interest rates have been at such a long time low, depositors are not buying 10 or 20 year CD’s. Therefore, most banks will only fix their commercial loan rates for 5 years. Many variables can happen in any kind of market within a 5 year period. At the end of the 5 years most banks have their loans set for a balloon payment. A balloon payment requires that the loan be paid in full at a given date. So, what was a fixed rate for 5 years suddenly becomes due in full. This will force the borrower to refinance– adding more additional fees.
At Surety Bank we don’t like to see this happen to our clients after they have been consistently paying down their loans for 5 years. We typically tend to float the rate on an index that is tied to the prime rate. The prime rate is a “reference or a base rate” which is set on the federal funds rate which is set by the Federal Reserve. Banks use this to set the interest rates of their commercial loans. It is a short-term rate that fluctuates. By doing this we can save the borrower thousands of dollars they would otherwise be required to pay in refinancing fees and taxes.
3. Do I need to personally guarantee the loan?
Generally, most small businesses are closely held and one hundred percent owned by the borrower. The Small Business Administration standards say that any individual who has over a 20% stake in the business should be part of the process for the loan guarantee. If there are business partners or investors they too should be willing to be part of the guarantee. A good option to help minimize your risk can be to spread it among several parties. In our current lending environment it is considered reasonable to back your own loan 100 percent through collateral, cash, property and other investments. It’s important to sit down with your banker and discuss all these finer points to determine the best options for your business plans.
4. What are the fees associated with the loan?
Commercial real estate loans involve certain fees that add to the cost of the loan. Some of these fees may include an appraisal of the collateral, title insurance, surveys, credit report and origination fees, underwriting fees, property insurance, liability insurance and attorney fees. In the state of Florida a Documentary Stamp Tax and Tangible Tax are levied. These fees can run into the thousands when all added up. Be certain to ask about any fees listed when you apply for your loan.
5. When can I close the loan?
Lenders do their due diligence on a proposed commercial loan. This will include a financial review. The bank will need confirmation that the collateral is sufficient to assure the repayment of the loan. These documents will include 3-5 years of financial statements and an appraisal, which can take 3-4 weeks. A loan must go to the underwriters for document verification and approval. The better prepared the borrower is with all the necessary documentation, the more swiftly the process will proceed. A commercial real estate loan can take anywhere from 45-75 days depending on the complexity of the loan. Asking questions and obtaining evaluations will help reduce delays and frustrations.