Commercial loans are very different from home loans.  If you are new to commercial property ownership, expect both the loan terms and the application process to present some new features.

The Commercial Loan Process - It's different from getting a home loan!

Timing.  Commercial loans take more time than residential loans.  While emergency closings have been done in four weeks, you should plan a minimum of 45 days and a maximum of 75 days, depending on the type of loan needed.  If your loan involves construction – either tenant improvements or ground up construction – you will almost always need more time.  We urge you to discuss timing with us before you lock into a purchase agreement.  See Understanding Escrows for more information.

Appraisals.  Appraisals take longer and cost much more for commercial properties.  In today’s busy market, appraisers need from two to four weeks.  Some borrowers are shocked to hear commercial appraisals also cost up to ten times more than residential reports.  You can expect to pay anywhere from $1,500 to $6,000 or more, depending on the complexity of the study. Why is this?  Commercial appraisers have much more work to do.  They have to determine the land value, the cost to rebuild the building, the zoning for the property, the highest and best use of the property, comparable sales of other similar buildings, market lease rates for similar buildings, the net operating income, market cap rates (return on investment) and the depreciation on the building.  Their reports have to analyze buildings with three approaches to determine three different values based on the income, the replacement cost and the sales of similar buildings.  As you can see, commercial appraisals require lots of time and expertise, which accounts for their higher cost.

Environmental Reports.  Most commercial loans require an environmental study to be done on the property to make sure the soil is not contaminated and that the current and prior uses do not pose environmental threats.  These reports will cost you from $900 to $2,000.  Lenders will demand them on all gas stations, most industrial properties, but for very few office buildings or apartments.

Other Reports.  Loans over $2,000,000 made by life insurance companies, conduit lenders and some larger banks will require additional reports, including a seismic analysis (in California), engineering and a physical condition report.

Contingencies.  In a commercial escrow, you must watch your contingency periods very closely.  Contingency periods are spelled out more specifically and enforced with less flexibility.  You might have different contingency dates for each item you are investigating.  After the financing contingency date, you will not be able to cancel escrow and get your deposit money back if the lender declines your loan.

Disclosures.  Commercial building sales and loans do not have the consumer protection laws on disclosures that you enjoy with home loans.  You will not receive many preprinted disclosure forms from the seller or from the lender.  The government assumes that commercial borrowers are more sophisticated, so they don’t need to be protected.  You are advised to rely heavily on your real estate broker, attorney, CPA and Rozelle Financial to help you understand the full implications of your purchase contract and your loan.

Documentation.  There is no such thing as a "no doc" commercial loan.  You must provide personal financial statements and probably two or three federal tax returns as well as additional financial information.  On business related loans you must provide business tax returns for three years, a year-to-date financial statement, agings of accounts payable and receivable and a debt schedule.  Commercial loans require a lot of paperwork, from the beginning of the process to the very end.

Commercial Loan Terms are Different, Too.

During normal economic times, lenders have found that home loans have fewer defaults than commercial loans.  In tough times, the last thing people will let go back to the bank is their home.  Consequently every feature of a home loan is more favorable than a higher risk commercial loan.

Loan to Value (LTV). You might be able to buy a house with nothing down, or as little as 5% percent, but not a commercial building.  Commercial loans require at least 10% but often 25-35%, depending on the property and loan type.  See the more detailed discussions on LTV under Buying and Refinancing.

Valuation.  If you apply for a 90% home loan, you expect to get a loan equal to 90% of the purchase price.  You can’t always count on that in a commercial purchase.  If you buy an income property, expect the appraiser and lender to value the property below what you are paying for it.  They usually take at least 5 - 10% of the income away as vacancy and management reserves, which in turn will reduce the value.  Your 75% loan most often ends up closer to 70% of the purchase price.  Note, however, this reduction does not tend to happen if you buy a property that your business will occupy.  These 'owner occupied' properties tend to appraise at the purchase price in today’s market.

Points and Fees.  You can find a no points, no fees home loan, but not for a commercial loan.  In the residential world, the lower fees are easily added into the loan and become transparent to the borrower.  There is a good reason.  Most home loans are immediately sold in the secondary market, so the lender gets their money back within a couple months.  This immediate profit reimburses them for all their costs.  Commercial loans have higher fees that cannot be buried in the loan as easily, and few of them are sold to help lenders recoup their costs.  In addition to your down payment, you will pay points to the lender and the cost of the appraisal, all other reports, escrow and title.

Loan Broker Fee.  Loan broker fees are also not buried into a loan in most cases.  With just a couple exceptions, our fee is paid by borrowers at closing.  Many lenders offer wholesale terms on their loans when borrowers are represented by a mortgage broker.  In these instances the loan costs are the same whether you use our assistance or not.  Because our fee must be paid by you, we generally define it with a written agreement in advance.  We are very careful to explain with each loan whether our fee is paid by you or by a rebate from the lender.

Prepayment Penalties.  Most fixed rate commercial loans and an increasing number of adjustable loans have prepayment penalty provisions.   We will make sure you understand each loan’s potential penalty.  Penalties can reach over $250,000 on larger loans, so make sure you watch this.  Lenders sometimes gloss over this feature while presenting their loan, but as your advocate, we make sure it is perfectly clear.  Penalties may be a fixed amount, a percentage amount, a certain number of months’ interest or a complex formula based on how rates change. 

Loan Term.  While most first-time commercial borrowers ask for a 30 year fixed loan like they got on their home, such loans are almost non-existent in the commercial world.  The most typical loan has payments amortized over 25 years.  Thirty years is very rare, but 20 years is also common.  Most commercial loans have balloon payments, typically after 10 years.  A fully amortized loan, one without a balloon payment, is only common with SBA and apartment loans.  Commercial borrowers, like residential borrowers, will frequently want to refinance their properties, so a balloon loan usually does not need to be feared.

Fixed Rates.  In the commercial loan world, we refer to any loan that is fixed longer than one year as a fixed rate loan.  Loans fixed for one year or less are considered adjustable.  With home loans, a loan that fixes for five years then adjusts will probably be called an adjustable loan.  So if you ask for a fixed commercial loan, you may be presented with choices of loans that fix for five, seven, ten, fifteen, 20 or 25 years.  The longer your fixed rate period, the higher the interest rate will be.  Most people choose not to fix rates longer than 10 years to avoid higher rates and a longer prepayment penalty period.