What sets commercial loans apart from residential financing is that a commercial real estate loan is secured for the purpose of revenue generation. For that reason, best practices for commercial real estate financing are considerably different than those in residential real estate. In order to secure commercial real estate financing, you’ll have to present your plan to turn your CRE loan into revenue. Commercial lenders that don’t have confidence in your business plan know their capital will be at risk.
The following best practices regarding commercial real estate financing will give you things to consider during the loan origination and documentation processes.
While consumers can and do default on loans, businesses loans fail at a much higher rate. As a result, interest rates are generally higher for commercial real estate loans. And because lenders are taking on more risk, they are also more discerning when it comes to their underwriting process. For this reason, a detailed business plan must be built and structured to provide the lender confidence that they will see a return on their investment. You need to provide examples that help define and exhibit your financial strength. It’s common for lenders to request several years of tax returns, asset statements and accounting reports.
The Commitment Letter
The first step in the real estate financing process is the signing of a commitment letter, which outlines all parties involved, the loan amount, interest rate and payment terms, and collateral pledged as security for the loan.
While a commitment letter is good for ensuring the borrower and lender are on the same page, it’s important to note that it is binding. For that reason, make sure you’ve secured a commercial real estate attorney prior to signing anything, including a commitment letter.
Loan documents are considered by many to be the most important element in the commercial real estate financing process. They’ll outline the duties, rights and obligations of both lender and borrower throughout the life of the loan. Lenders should never take a one-size-fits-all approach to loan documentation. They can take on a variety of forms, which is another reason obtaining experienced legal representation is vital.
The financial crisis of 2008 centered primarily on residential mortgages, but the uncovering of a lack of lending due diligence trickled down to the commercial real estate market. In short, there’s now greater commercial lending scrutiny, so making sure your ducks are in a row is more important now than ever.
If you’re looking to secure commercial real estate financing, your first order of business should be securing proper legal representation. And “proper” means hiring an attorney who has experience working with parties on both sides of the commercial financing process. That’s why you should contact the skilled commercial real estate attorneys at Bennett Weston LaJone & Turner, P.C.