Commercial Loans are very different than Residential Loans. If you are new to commercial loans please do take some time to understand how it works. Unlike residential mortgage industry there is very little state or federal regulations monitoring commercial lenders, brokers and loan originator infect most state do not require a license to originate, broker or lend money for commercial loans. The assumption is that an investors or business persons are smart enough to fend for themselves; unfortunately there are companies that will take advantage of you if you are not familiar with commercial mortgage loans.

To start with understand commercial and business loans are not the same. Commercial loans are the loans where the mortgage is originated on a piece of real estate with improvements there on similar to residential mortgages. Business loans are for inventory working capital etc. and are generally obtained through Small Business Administration, Business lines of credit or Hard Money Loans from investors.

STICKER SHOCK: Unlike residential mortgages where an appraisal costs anywhere from $200-S750, commercial appraisals could cost you from $1,500 - $5,000 or more in some cases.

Interest rates can be 3 to 4% higher than residential mortgages and there is no 100% or interest only financing available. Be prepared to put down 10 to 15% down payment depending on the property category, documentation type and your credit. In most cases, where bank will only lend 60 to 70% of the appraised value or purchase price whichever is less, the lender, in most cases, will let the seller hold a second mortgage to cover the balance as long as the combined loan to value does not exceed 85 to 90%.

Most lenders will classify the property in different Tiers. Multy family and mixed use properties are considered least risk so it will be Tier 1, Higher Loan to Values better rates. Office space, retail, warehouse, mobile parks, bed and breakfast and self storage fall under Tier 2. Light industrial, automotive, franchised hotel/motels, rooming homes, marinas and funeral homes are considered Tier 3. All special purpose properties, day care centers, independently owned hotel/motels, campgrounds, educational facilities, restaurants, car wash, golf courses and RV parks will be Tier 4. Higher the Tier higher the interest rate and lower loan to value.

WHY SHOULD YOU CONSIDER US AND NOT GO TO YOUR BANK: Here is what I will suggest, try your bank first, no doubt in some cases you will do better on the terms of the loan with a bank however commercial loans are very hard to get through banks due to the  documentation requirements and debt ratios. Most business people have a hard time providing income documentation the bank may require. Most bank loan officers are salaried and may not have the urgency to close the loan on time; it could easily take 3 to 6 months where as a good broker can do the same loan in 45 to 60 days or less. Consider the time and loss of business during that period.

THE PROCESS: A good broker will start with a client qualification form to determine the client needs and qualification for the loan to fit the client’s business model and plan.

The next step will be to get a loan application and obtain credit report and submit it to the lender for a commitment. The lender commitment should always have all the terms of the loan specified including pre-payment penalty and lock out period. Unlike residential mortgages on commercial loans you may have a lock out period where for that term you just cannot pay-off the loan even if you pay the pre-payment penalty. Once you are satisfied with the terms, you will sign the letter and give the payment for the appraisal in the form of a cashiers check or credit card depending on the lender requirement.

ENVIORMENTAL STUDY: In most cases on some properties a broker or lender can get you an environmental insurance for a fraction of the cost of an environmental study which could cost thousands.

So my recommendation is to find a knowledgeable commercial mortgage broker and assess your particular situation. Remember if you need surgery you will go to the best surgeon and not necessarily the cheapest.

Binny Kapur is a certified commercial broker and offers FREE CONSULTATION to his clients.

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