Commercial Property or Commercial Loan: The Chicken or the Egg?
You need a loan before you can buy a commercial property, but shouldn’t you know what property you want to buy before you apply for a loan? This is the chicken-or-the-egg conundrum of commercial real estate. What is the answer? Where do you begin? Who would you call to walk you through this process?
Not to worry! We will walk you through the relationship between commercial lending and commercial real estate so you can feel confident taking your best next step toward your goal of owning your own commercial space.
First Budget, then Browse
The simple answer to this question is this:
“It makes sense to start by working with a commercial lending specialist. ”
The worst thing you can do is go out and begin down a path to purchase commercial real estate only to learn that you are out of your league, or maybe you are leaving opportunity on the table. Your ideas, priorities, and dreams are all important to formulate your vision, but you have got to be able to act with confidence when the right property comes before you. Being a buyer that CAN act is one of the most important bargaining tools in the tool belt.
There are so many moving parts when purchasing commercial real estate and making it work perfectly for your business. For this reason, it is not as simple giving a “mortgage lender” your income and credit score to get prequalified for a certain amount. Especially for an operating business making a location work might mean equipment, special improvements, or modifications etc. This might even mean utilizing more than one type of loan. At minimum there should be a “Discovery Consultation” with a Commercial Lender (do not walk in and ask your personal banker). They will want to know what you are supporting in the way of lease payments now, and what your idea of a comfortable monthly debt amount to service in a new location might be. Are there purchases other than just real estate that might need to occur to make this vision come to fruition?
How do I find the right Commercial Lender?
The first key to discovering your borrowing potential is finding a commercial banker.
There are many wonderful commercial lenders out there, but this is one of those occasions when one size might not fit all.
As you choose who you would like to work with on this journey, we recommend you consider these important points:
Should I look outside of my own back yard? More than likely you already bank somewhere. Maybe you have an account at a Bank or a Credit Union. Sometimes sticking with the institution, you already bank with is not only the easiest answer but the best answer. Ask yourself these questions; Has my business already borrowed here before and established a repayment history? Do I trust the personnel I work with there to tell me everything that is in my best interest? If I have borrowed here before was the process smooth? Is my bank already collecting my current financials? If the answer is yes, then they are in a good position to advise you on your situation. Ask your banker how often they lend on the type of property you are looking for. It is critical that you choose someone who is knowledgeable about every facet of your type of transaction.
Community Bank or National Giant? Every business longs for the time when they could walk into their local bank and get a loan on a handshake. While a deal on a handshake is unlikely, there are definite advantages and disadvantages of dealing with any size of lender. Often in a community bank you have a banker that you know and knows you. Often, they will even be quite familiar with the area you are buying in, or sometimes even the specific property! There could be events in the performance/financial history of your business that they have a greater degree of comfort with. A small bank may be able to make an approval decision on the loan faster and more directly because the lender is involved in the decision process as opposed to sending things off to a centralized underwriting center. The flip side of a small community bank can sometimes be their rates and terms may not be quite as aggressive as a large bank. If you are looking to utilize the Small Business Administration (SBA) to assist with your purchase they may have “Preferred Lending Status” authorizing them to decision loans on behalf of the SBA. Banks must do enough loan volume with the SBA to be given “authority” to make loan decisions without a full underwriting and approval from SBA office.
An Alternative to Going Directly to the Bank or Credit Union
There are “Commercial Loan Brokers.” This is someone who works with many banks (large and small) to recruit and package loans for their review. This can be an advantage because a broker will have a good handle on which lending institutions have an appetite for the type of loan you might be in the market for. A broker will also have very current experience with how various lenders are turning requests around. This is particularly important today because with the “PPP Loans” that have come out of the pandemic some larger banks are so busy processing these requests their turn around time has become significantly slower.
We talked with Michael Wetnight, CEO and Founder of First American Commercial Lending, a Phoenix based brokerage, and these are his top recommendations for a buyer.
#1- Be prepared to share. For a lender to have a sufficient understanding of the financial capacity of a borrower the following items will be requested.
Company description: Executive summary (few paragraphs), business plan, or website.
The ownership structure (if multiple owners a detail of % of ownership) and organizational structure.
Estimates for equipment or special improvements you anticipate at this property.
Any issues like tax liens, foreclosures, BK’s or any other derogatory credit issues over the past 7 years and please provide a brief explanation.
Personal Financial Statements from all owners
3 Years business tax returns (or if in business less than 3 years all tax returns available)
3 Years business financial statements (Includes P & L and Balance sheet)
Current interim (current year to date) business financial statements
3 Years personal tax returns for all borrowers and/or guarantors
#2-Walk through the entire process with your lender. The time and money required in a commercial property acquisition can be surprising for buyers. Ask your lender about all the possible expenses they should expect in addition to the money they are putting down on the purchase.
#3-Work with professionals. Once your lender has given you some monetary guidance make sure you are working with a top notch Commercial Real Estate firm. Just like lenders, real estate agents are sometimes experienced in certain segments of the market. Make sure your Real Estate Professional has experience with your type of purchase. Your lender and your agent should be managing the transaction together to make sure there are no surprises.
When do I Start Looking for Commercial Properties?
After you have gone through a Discovery Consultation with a lender, and they have given you some borrowing guidance you are ready to find the perfect match. Don’t fret though, at Commercial Property Connect we uncover the need to have a consultation with a Commercial Lender during our Intentional Search™ process. We are here to help guide you through all the steps.
Let the (Intentional) Search™ Begin!
The first step that begins the journey to your ideal property is what Commercial Property Connect calls the “Intentional Search™.”
We will invite you to a comprehensive 90-minute session that is entirely unique in the Commercial Real Estate industry. This proprietary process gives the buyer an opportunity to learn important aspects of buying commercial real estate so there are not any surprises along the way. More importantly it gives the Real Estate Professionals a chance to learn every detail of what a perfect property would look like for the client. Commercial Property Connect does the necessary leg work to only bring you the best possible matches. Because of this algorithmic process and the time, we invest on the front end, we can lead you to your best solution in a shorter time. Because we know what you are looking for and we invest our time doing extensive research we eliminate the wasted time for our client.
Starting with solid footing from a financial preparedness standpoint and then using a cutting-edge search process results in what our past clients have described as, “one of the most pleasant experiences I’ve ever had.”
We want you to have this kind of experience. Let us help you get the chicken and egg in the right order. When you first have the pre-approval for the loan in place, you get the chicken because you had the egg! Or would it be that you could get the egg because you had the chicken??? Good thing the commercial property purchase process is simpler than the chicken and the egg paradox!
