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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.
This​ ​specific​ ​problem​ ​won't​ ​be​ ​applicable​ ​to​ ​all​ ​business​ ​creditors.​ ​But​ ​if​ ​it's​ ​relevant,​ ​you​ ​should
try​ ​out.
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
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
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)
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.

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