Bryan Nazor states that commercial real estate loans are loans to purchase a new property or renovate a property currently owned by the business. Commercial loans come with certain caveats that set them apart from residential mortgages, and there are several avenues that a business can use to seek a loan.
Bryan Nazor explains that commercial property must not be used for residential purposes. The business must occupy at least 51% of the property. If you wish to rent or lease a portion of the property, it must be less than 50% of the total property. Commercial loans are typically for shorter time periods than residential mortgages with a longer amortization schedule. Amortization is essentially the interest paid on the loan. According to Bryan Nazor, often commercial loans have a payback period of 5-20 years, with an amortization period of up to thirty years. This results in a final balloon payment at the end of the loan to cover the excess amortization.
Commercial loans may be guaranteed by the individuals involved in the business. This means their personal credit history is taken into account, and they are accountable for any remaining balance in the event the loan defaults. If the individuals do not guarantee the loan, it is called a no recourse loan, because the lender has no recourse other than repossessing the property.
Bryan Nazor explains that lenders will look at the company’s FICO SBSS score. Typically, the FICO score should be 140 or above, but there are options for businesses with lower scores. The lender will also check the company’s debt coverage service ratio. The debt service ratio is calculated by your net operating income divided by your annual debt payments. Most lenders require a score of 1.25 or better. Essentially, you should be able to pay all your debts and still clear a 25% profit margin.
Even if you aren’t asked to act as a guaranter, lenders will often check your personal credit score as well. A low personal score can negatively impact your chances of getting a commercial loan Bryan Nazor explains.
Lastly, a lender will consider the property itself. Property value is a major consideration when obtaining a commercial loan. Bryan Nazor says that most lenders will lend a maximum loan to value percentage. This is often between 65%-75% of the value of the property. The remainder must be paid as a down payment to obtain the loan.
Bryan Nazor is President and Chief Operating Officer of Main Street Title & Settlement Services, LLC. He holds a law degree with distinction from New York University Law School. He’s played professional soccer in three countries and continues to share his passion for the sport through youth soccer coaching.