Top 10+ Commercial Real Estate Problems .pdf
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This article explains recurring problems
with real estate loans that commercial
borrowers and their advisor should
anticipate before it is too late. The
following problems are common in
traditional bank commercial real estate
loans and should be avoided if feasible
(special circumstances will periodically
make some of these terms unavoidable)
Commercial Real Estate Problem
Number 1: SPECIAL PURPOSE
Properties which do not fall in the categories of retail/office building or restaurants are usually
placed in this specific purpose qualification. For specific purpose properties it is getting more
and more tough to find commercial loans. It follows that business acquisition loans for
commercial properties such as restaurants/bars and auto services companies are often difficult
to find. Commercial funding will be much more challenging to locate for these specialized
properties such as churches, funeral homes, nursing homes and assisted living facilities.
Commercial Real Estate Problem Number 2: TAX RETURNS VERSUS STATED INCOME
Most conventional banks will need many years of tax returns to be able to meet the
requirements for a commercial property loan. The option is to use stated Income creditor that
doesn't verify personal assets or income. Many borrowers will just not be eligible for a
commercial mortgage loan when tax returns are used due to high business expenses (low net
income). Many lenders utilizing tax returns will even continue to confirm income after the loan
closes. Stated Income creditors won't participate in this practice.
Commercial Real Estate Problem Number 3:SHORT-TERM LOANS(LESS THAN FIFTEEN
15-40 year commercial real estate loans with no recall/balloon feature are readily available.
Commercial Real Estate Problem Number 4: RECALL/BALLON FEATURE
These conditions are used by a number of banks to efficiently shorten most commercial
property loans to 3-7 Years.
Commercial Real Estate Problem Number 5:UPFRONT COMMITMENT
Processing/retainer fees must be seen as an acceptable and a Standard business practice
when dealing with commercial property loans. Under most cases, commercial debtors shouldn't
pay such fee. Please be aware that processing/retainer fees aren't included in this conversation
of commitment fees.
Commercial Real Estate Problem Number 6: REQUIREMENT TO SIGN IRS FORM 4506
This type is routinely demanded by the majority of conventional banks and a number of other
commercial creditors to get a Business acquisition loan. IRS Form 4506 authorizes the creditor
to obtain a debtor's tax returns directly from the IRS. Commercial borrowers using a Stated
Income creditor with limited documentation requirements will prevent this requirement.
Commercial Real Estate Problem Number 7: CROSS-COLLATERALIZATION
For a commercial real estate loan Commercial borrowers shouldn't have to use their private
assets as collateral.
Commercial Real Estate Problem Number: 8 BUSINESS PLANS
Under many circumstances, commercial debtors shouldn't use lenders who demand a business
Commercial Real Estate Problem Number 9: SOURCING AND SEASONING ASSETS.
SEASONING OF OWNERSHIP.
This specific problem won't be applicable to all business creditors. But if it's relevant, you should
Most banks have stringent rules for seasoning and sourcing of possession or assets to meet the
requirements for commercial property loans. Seek out a lender without seasoning and sourcing
limitations or requirements. Commercial creditors will frequently seek for documentation about
where the down payment is coming from (sourcing). Commercial creditors will also often have
very particular requirements stipulating that the capital must have been at a particular account
for a particular time period, frequently 3-6 months or even more (seasoning). Seasoning of
Ownership is similar to seasoning of capital, except this condition requires the minimum time
somebody has possessed a commercial property before they can refinance the properties.
Commercial Real Estate Problem Number 10: EXCESSIVE DURATION OF THE
COMMERCIAL PROPERTY LOAN PROCEDURE
Many conventional banks require three to nine months to close a commercial mortgage. A more
action-oriented business lender will shut commercial property loans from 45 to 60 days.
Commercial Real Estate Problem Number 11: MINIMUM COMMERCIAL REAL ESTATE
LOAN SIZE THAT’S TOO LARGE FOR THE COMMERCIAL MORTGAGE NEEDS
It's not uncommon to encounter a minimal commercial property loan demand of $500,000 to
Commercial Real Estate Problem Number 12: DEBT SERVICE COVERAGE RATIO (DSCR)
IN EXCESS OF 1.2 TO GET A BUSINESS ACQUISITION LOAN.
The very flexible approach to DSCR for a commercial real estate loan will call for a DSCR at the
range of 1 to 1.2, with exceptions allowing a DSCR less than 1.