There are three types of financing for the purchase of a Commercial property.
TRADITIONAL COMMERCIAL MORTGAGE
The tried and true traditional method of financing for a Commercial mortgage can be the most favorable for a Borrower regarding rates and terms. This method of financing can also be the most challenging.
For a traditional commercial mortgage, the Lender will require a minimum down payment of 25%. You should be prepared for a larger down payment once the loan is well along in the processing. More on that below.
The Lender in this type of financing also requires more documentation from you, the Borrower, and from the property you are purchasing. This documentation runs the gamut from Bank Statements to tax returns, and any business documents for the Borrower’s business the Lender deems necessary.
For the property, a detailed Income and Expense statement is required. If the property is a rental property with residential tenants subject to local municipal housing agency regulations, the Lender will require the appropriate documentation from any and all housing agencies involved in regulating the residential rentals.
The “traditional” commercial Lender appraises the property based not on market value, but rather on a calculation unique to each Lender to determine the Lender’s exposure to risk based on the Net Operating Income for the property. Net Operating Income (NOI) is calculated from Gross rental income and a detailed ledger of expenses. This valuation method can often lead to a final appraisal value lower than the purchase price and market value of the property. Traditional Lenders use this method as a way of reducing risk exposure.
Therefore, you’ll want to be prepared to make a larger down payment at closing due to the Lender’s appraisal potentially being less than the purchase price AND the Lender’s criteria of lending no more than 75% of the appraised value of the property.
When we at Aurora Business Consulting prequalify you for a purchase, we look to qualify you first and foremost under the traditional lending method.
NON-TRADITIONAL COMMERCIAL MORTGAGE
A vibrant market exists of Lenders willing to lend on commercial properties with criteria more flexible and liberal in the risk-tolerance than traditional Lenders. Rates and terms with these Lenders are frequently higher than what a Borrower would pay with a traditional Lender. But the opportunity to find financing in this arena is substantially improved due to the more flexible criteria.
Examples of the flexibility in the Non-Traditional Lending field include:
- Lower down payment requirements: as low as 10% down payment.
- Quick documentation/reduced documentation requirements: for example, a cash-flow analysis of a Borrower’s bank statements over 12 or 24 months as an alternative verification method from tax returns.
- Credit Scores. Non-Traditional Lenders can have a better appetite for lower credit scores.
SELLER FINANCING
Many purchasers of commercial properties often cannot qualify for loans, either through the Traditional or Non-Traditional lending channels. The reasons for not qualifying are many and varied and may include the Borrower’s personal qualification criteria such as down payment, credit or income. In other instances, the property being purchased may not qualify for Lender financing of any sort.
These purchasers can often negotiate with a property-Seller to “self-finance” a property purchase. In this instance, the Seller holds a note from the Purchaser. A mortgage is created and the appropriate lien is filed against the property. The Purchaser/Borrower will make a down payment and then make monthly payments to the Seller, usually for a short term of anywhere from 3-7 years.
Typically the Purchaser/Borrower will then refinance that loan into either a Traditional or Non-Traditional mortgage after building sufficient qualifications.
Negotiating such a unique financing package can be complicated.
Visit our Financing Fodder YouTube Playlist for more information on how to prepare yourself when requesting a business loan.