Money from Commercial Real Estate

The "good news-bad news" business enterprise is one that finds itself in a cash crunch, but already owns unencumbered commercial real estate that can be mortgaged.

When we speak of commercial real estate, we mean land and buildings that are owned by or used by a business rather than for personal use.

Compared to financing business operations, obtaining financing for real estate purchase or improvement is a borrower's "piece of cake." And of course, a business that owns real property can always use it as collateral for a cash equity loan. Oddly enough, many businesses that have been around for a while, buying land and buildings at their inception, find in a few years the real property has increased in value far more than the business operation itself

Therein lies the cash.

The reasons a lender is almost always willing to loan money, even to a shaky business enterprise, with real estate as collateral, are all very reasonable: land isn't going anywhere, it will always be marketable, it retains value, and it can easily be appraised as to exact value.

Customized Mortgages

Although home mortgages can almost always be written by filling in the blanks on a printed form, commercial real estate financing deals each have to be customized. That is because there are so many more variables involved in these deals, including zoning, occupancy, the proposed business use, licensing of occupants, degree of risk and the credit of the land owner. Some types of commercial real estate used for rapid turnover businesses like restaurants or gas stations are unattractive to lenders. Others, like apartment houses, are better bets for financing.

Financiers are also wary of land that may have been used in the past for purpose that produced environmental damage or toxic wastes. Under federal law subsequent owners are made responsible for clean up costs once land is found to have such problems. Needless to say, a surprise like that instantly diminishes land value.

Terms and Money Sources

Most conventional commercial real estate lenders will finance from 65to 70 percent of appraised value, including improvements. For purchases, lenders determine down payments based on a formula taking into account cash flow to cover all costs of the purchase including occupancy, taxes, interest, insurance, maintenance, and management. A similar formula will determine the amount of equity that can be borrowed against already owned real estate. The SBA requires only a 10 percent down payment for business real estate. Sometimes a lender will defer payments until cash flow increases, but that is rare. More likely is a balloon payment plan, a few years of lower monthly payments, then the balance all comes due at once, requiring re-financing.

Banks, savings and loans, commercial mortgage brokers, venture capital are all good sources for real estate financing because they all like hard assets as collateral.

Hard Money

There are also so-called "hard money" brokers and direct lenders who get their name from the type of bargain they drive. They rarely lend more than 65 percent of the property's value and they may charge from 3to 15 points on top of the deal. They usually lend only for the short term- three to five years at most. But hard money people rarely ask many questions about credit, confining themselves to the real property in question. They move fast, settle in days, and are often available for temporary "bridge" loans or to avoid foreclosure in a pinch. Of course this often means refinancing within a short time, but it does produce cash in a hurry.