If you believed what the advertisements said then getting approved for a commercial property loan should be a breeze. However, on the ground, getting the money in your hand without running from pillar to post remains a dream for most people who end up being completely frustrated encountering the bureaucratic process and the unhelpful attitude of the lenders. However, what most people fail to understand is that there are quite a few steps that you can take to make the loan process conclude without a hitch as well as get the best possible deal. Some useful tips straight from the commercial property lenders themselves:
Get Yourself Organized
The first thing to kick off the loan application process is to get a copy of the application form. In case there is no standard format, ask for a list of all the documents that the lender will require for evaluating your application. Typically, lenders will ask for your recent financial statements, tax returns, copies of sales contracts, rental schedules, copies of leases, bank statements, property outgoings statements, as well as asset and liability statements. Make sure all the documents are complete and preferably vetted by your accountant so that they do not have missing information of inaccuracies that can get your application rejected. Submit all the documents in a dossier arranging them according to the year, starting from the most recent. Presenting the loan application professionally creates a very good first impression that will help you in getting the loan approved.
Establish the Accurate Value of the Property
Regardless of whether you are applying to get a loan to buy a commercial property or borrowing against a property that you already own; lenders like to know what the real market value of the property is. There is no point is painting an overly optimistic picture as lenders like Liberty Lending have the pulse of the market, and in any case, would also be guided by independent valuation reports before extending the loan to you. A deliberate attempt to fool the lender is considered to be extremely unprofessional and will be held against you. Generally, the value of a commercial property is arrived at either by a process of comparison with sales of other properties in the same or similar market or on a capitalization basis. The capitalization method factors in the net rental income from the property and the cap rate, which is derived from estimating the sale price and then dividing it by the net income.
Have a Properly Outlined Property Strategy
Even if the lender is convinced that the loan has is adequately securitized by the property being acquired, they still like to know how the acquisition fits into your business strategy. This means that you will need to be ready to convince the lender about why you want the loan and how the money will add to your profitability or add value to the property. This is the part a lender will typically take the most interest in because he will get to know how confident you are and what your level of expertise is in the business.
Prepare Your Organization Structure Chart
Typically, commercial property investors structure their businesses as a private limited company, a family trust, a partnership or even a special purpose vehicle, among others. Lenders need to know how the structure is arranged and don’t want to spend their time and effort deciphering it, which is why you should be ready with a clear and accurate pictorial representation of how your legal entity is set up. According to https://huntrealestatecapital.com, commercial mortgage lenders will typically lend to borrowers who have a credit score of more than 680, have a track record of at least three years, no bankruptcies, foreclosures, or tax liens in the recent past, and are willing to contribute at least 10% of the acquisition cost of the property.
Prepare an Updated Tenancy Schedule
It is important to prepare a detailed tenancy schedule listing the name of the tenant, the property let out, nature of the business being operated in the space rented out, lease commencement and expiry dates, the monthly rental amount, percent of rentals paid up, any options on the lease terms, etc. The rental schedule will give a good idea to the lender about your cash flow and how good you are as an investor. Preparing a cash flow statement for the next three years is a very good idea as it will give lenders a more accurate idea of your view of the asset and relate aspects like vacancies and capital expenditure. Lenders will also be impressed if you can give them a detailed asset-liability statement because it shows you are a professional who understands the concerns of lenders and that you are willing to help them with tasks that they would have to do anyway, allowing faster approval of the loan.
Estimate Your Loan Servicing Capacity
The amount of the loan that you will be eligible for will depend on your capacity to repay. You can get an estimate in two different ways. The first one, Standalone Servicing, takes into account only the net income after setting off expenses divided by the interest payments, while the other method, All Sources Servicing, takes into account the net income of the borrower from all his sources divided by his debt servicing commitments. It is obvious that lenders prefer the servicing ratios to be as high as possible but normally they would not be willing to lend if the Standalone Servicing ratio is less than 1.25:1 and for All Sources Servicing, less than 1.5:1. When negotiating with the lender, go on the front foot and tell the lender the rate of interest that you are expecting and the sort of origination fees, you are okay with. This strategy works better than fighting down the rates offered by the lender.
Look upon every loan application as being strategic. Go prepared with all the documentation as well as the state of the market including the rentals expected, the price per square foot at which recent deals have been concluded as well as your business strategy and repayment capability. If necessary, work closely with a professional commercial mortgage broker as they have the necessary skills to strike better deals with the lender.