What You Should Know About Commercial Loans for Your Real Estate Project

Credit may be tight for some borrowers of home loans, but money is readily available for solid commercial projects. Credit: Flickr CC user fsecart

If you’re thinking about getting a commercial loan for your real estate needs, you might be a little wary. Chances are good that you’ve heard credit is “tight” right now and it can be hard to get a loan. On the residential side, there is some truth to this. New consumer financial protection rules and government regulations have made it harder for borrowers with shaky credit to qualify for home loans. As for commercial real estate, however, this isn’t quite the truth.

For most commercial sectors, credit has been more readily available for a couple of years. The lending volumes suggest there is plenty of money on the street to do deals. It is also a good time to borrow money, as commercial real estate loan rates remain favorable to borrowers.

Commercial Loans Are Flowing into the Major Sectors

This is partially due to the fact that the commercial sectors didn’t fall as far as the housing market. Additionally, major commercial sectors have been rebounding steadily for the past three years. The multifamily/apartment and hotel sectors are booming. The industrial sector really never saw a major slowdown.

Only the office sector has suffered significantly, with stubbornly high vacancy rates after a period of heavy overbuilding during the lead-up to the recession. Companies also laid off workers and tried to shed office space. The office sector, however, has been recovering over the past two years in major urban areas, especially in regions with a high demand for office space, such as San Francisco. Although it is hard to get a loan to build an office building on speculation, lenders are funding new office building projects that are fully pre-leased. Loans are also readily available to purchase existing office buildings, as proven by numerous sales across the country.

With the economy improving, lenders and investors have been eager to give loans to good projects. According to the Mortgage Bankers Association (MBA), commercial and multifamily mortgage loan originations in the first quarter — the total amount lent out in the first three months of the year – increased by 49 percent compared to the same quarter last year.

Lending for multifamily homes and apartments saw a 71 percent increase in dollar volume compared to the same period last year. Lending in the hotel, industrial, and office sectors increased dramatically, as well, and retail had solid gains. Only the loan volume for healthcare industry projects was unchanged, although that steady volume can be seen as a little misleading because the healthcare sector has grown dramatically in recent years.

Major Investors Are Ramping Up Lending

Even more telling of credit availability, however, is that lending is up among all investor classes. The government-sponsored enterprises Freddie Mac and Fannie Mae, life insurance companies, and commercial mortgage-backed securities all put out significantly more money in the first quarter compared to the same period last year, the MBA survey found. Only lending by commercial banks was relatively flat, rising just 1 percent. The lenders also don’t seem to be discriminating against certain loan types. According to the New York Times, construction loans — which are generally considered more risky and harder to obtain — were becoming more readily available in a few major cities, even back in 2012.

This is not to say, however, that getting a commercial loan is easy. It has generally always been more difficult to close on a commercial loan than a home loan. Commercial loans are usually more complicated to put together and often involve bigger numbers. These loans can take months to close, rather than the weeks it takes to underwrite a standard home loan. Underwriters typically want more information, such as projected income streams from business operations, rents, and leases. With a standard home loan, the lenders typically evaluate only a borrower’s income, credit score, and the value of the property.

Don’t Let Financing Stop Your Commerical Real Estate Plans

Although credit isn’t particularly tight right now, numerous things can go wrong before a commercial loan can close. That’s why Forbes and other publications often list “financing” as a major reason why commercial and residential real estate deals fall apart. Sometimes the financing depends on tax breaks or credits and the developer has failed to obtain those — putting the cart before the horse, as it were.

A developer or potential business owner, particularly a first-time business owner, can’t approach the loan application process haphazardly. Lenders will demand to see a detailed business plan with projected revenues, a good credit history, a bullet-proof appraisal that shows the property value, and proof that the land has no major environmental problems. Also, lenders usually won’t finance more than 75 percent of the project, so the owner will have to put that much money down or raise at least that much in cash from other investors.

The bottom line, though, is that if a developer has a good project, lenders will finance it. Chances are the developer will get multiple offers at favorable rates. So, put fear aside. If your business venture has solid numbers, the owners and investors should have no trouble qualifying.

If your company has a project in mind and wants to evaluate the obstacles in getting financing or approvals, you don’t have to go it alone. You can get a thorough analysis from a consultant whose community values align with your own. Contact DCG Real Estate today to learn more.