Commercial Real Estate Financing and Loan Structuring


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Real Estate Financing Tips for Current and Potential Business Owners

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Author: Stan Faulkner, Founder, Perigon Legal Services, LLC

Mr. Faulkner is an experienced counselor and litigator with 15 years of experience, having held bar licenses in four states (Mo, Il, Ct and Ga). Stan Faulkner uses this experience and focuses his skills in the pursuit of assisting individuals in probate (trust and estate) matters, guardianships and conservatorships, estate planning, business disputes and contract disputes. Published on January 04, 2024.

A solid grasp of financing options and commercial loans is crucial for businesses and business owners. Commercial real estate loans differ significantly from conventional residential loans. The money on the line is simply too big for commercial banks and other lenders to take significant risks with.

Commercial real estate loan structuring is an important aspect to consider, as it influences the terms and conditions of the loan. This article discusses the types of commercial real estate loans available in the market, how loan restructuring works, what interest rates are, and the loan terms available.

Working with real estate attorneys could help you understand real estate financing options better. Here in Atlanta, Georgia, look no further than Perigon Legal Services. We provide personalized real estate solutions.

Understanding Commercial Real Estate Financing

A basic understanding of the available commercial property financing options is vital in determining the optimal choice. Commercial property loans can be used to buy a property or build it. These loans usually have loan-to-value ratios of 65% to 85%.

Types of Commercial Real Estate Loans

Depending on your business financing goals, mortgage loans, bridge loans, and construction loans are just a few options.

  • Mortgage loan: A commercial mortgage is a type of loan used to pay for acquiring or refinancing a commercial asset. They are provided by banks and commercial lenders, with minimum down payments of up to 20%, terms ranging from 5 to 20 years, and interest rates as low as 3%.
  • Bridge loan: Commercial bridge loans offer a first mortgage loan on commercial real estate for a short period, usually between 6 months and three years. Bridge financing is offered to borrowers trying to refinance an existing obligation or waiting for longer-term financing. Loan terms typically last up to 2 years and typically only require a 10% to 20% down payment.
  • Construction loan: A particular kind of loan used to fund the building of commercial properties is a commercial construction loan. They can be used to finance the construction of warehouses, retail stores, office space buildings, and other commercial properties.

Other commercial real estate loans include Small Business Administration or SBA loans, such as SB 7(a) and SBA 504, hard money loans, mezzanine loans, and CMBS or conduit loans.

Factors Influencing Loan Structuring

The process of deciding on a loan’s terms and conditions, such as interest rates, repayment plans, collateral requirements, and covenants, is known as commercial loan structuring. This process aims to create a loan agreement that meets your needs as the borrower while also aligning with the requirements of the lender and regulatory standards.

The following factors are considered in loan structuring:

  1. Loan Purpose: Clearly define the purpose of the loan. Are you acquiring, refinancing, or developing a property? Understanding your objectives helps tailor the loan structure to meet your unique goals.
  2. Loan Amount and Terms: Determine the amount you need and the timeframe for repayment. We’ll work together to negotiate favorable terms, such as interest rates, amortization schedules, and any balloon payments, to create a repayment plan that suits your financial capabilities.
  3. Loan-to-Value (LTV) Ratio: The LTV ratio compares the loan amount to the purchase price or appraised value of the property. Lenders assess risk based on this ratio, so we’ll strategize to present a favorable LTV that enhances your chances of approval.
  4. Collateral: Identify the collateral securing the loan. This could be the property itself or additional assets. Understanding the collateral requirements is crucial, and we’ll work to protect your interests while satisfying the lender’s criteria.
  5. Loan Covenants: Loan agreements often come with covenants outlining certain conditions you must meet during the loan term. We’ll review these carefully, ensuring they are reasonable and feasible for your business operations.
  6. Interest Rates: Discuss the types of interest rates available – fixed, variable, or a combination. We’ll explore the pros and cons of each, considering your risk tolerance and market conditions.
  7. Loan Repayment Structure: Determine the repayment structure that suits your cash flow, whether it’s a traditional monthly payment, interest-only periods, or customized options.
  8. Prepayment Options: Examine prepayment options, as they can impact your ability to pay off the loan early. We’ll ensure the terms provide flexibility while minimizing potential penalties.
  9. The debt-service coverage ratio (DSCR) is another metric that commercial lenders consider. The DSCR assesses a property’s capacity to repay debt by comparing its yearly net operating income (NOI) to its yearly mortgage debt service (principal and interest included). It is computed by dividing the annual mortgage debt service by the NOI.

A borrower’s balance sheet, income statement, and cash flow statement are among the financial documents that lenders will carefully review. Lenders can better understand the company’s financial situation and loan repayment capacity using this analysis.

Still, unforeseen events can affect the borrower’s ability to pay. In this case, lenders can seek loan modification to prevent costly foreclosures and defaults.

Legal Considerations in Loan Structuring

Contractual Agreements and Clauses

Under Rule 80-14-5-.01 of the Rules and Regulations of Georgia, the loan contract shall include the following:

  • Date of transaction

  • Description of the loan subject and the transaction’s amount

  • Description of the property securing the loan, if any

  • Name and address of the borrower and the creditor

  • A detailed schedule of the payments

  • Actual cash advanced to or for the consumer, if any

  • Amount of insurance and the premium paid, if any

  • An exact amount of the fees, interest, and other charges, if any

The federal Truth in Lending Act also provides that the borrower must be provided the following information:

  • The loan term

  • The annual percentage rate (APR)

  • The cost of taking the loan

  • The borrower’s rights, which must include the right to rescind the contract

Navigating Interest Rates and Terms

Standard to every loan agreement is some sort of interest that needs to be paid. Although they can be negotiated, interest rates are typically expressed as either variable or fixed. The interest rate on the outstanding balance of a loan with a variable interest rate fluctuates in response to changes in the market interest rate. On the other hand, a fixed-interest rate loan has an interest rate that doesn’t change over the course of the loan term.

The length of the amortization period and the commercial real estate loan term have an impact on the interest rate that the lender will charge. Commercial real estate financing terms may be negotiated based on the borrower’s creditworthiness. The interest rate could increase with the length of the loan.

Preparing for Potential Challenges

Commercial real estate lending is complex enough. A real estate attorney can help make the whole process smoother, guiding you through commercial real estate transactions. A real estate attorney can help analyze contracts and agreements, ensuring they are in your best interests.

Perigon Legal Services can help in issues such as fraud, breach of contract, possession and title disputes, and boundary line disputes.

Contact Perigon Legal Services for your Commercial Real Estate Financing Needs

Financing for commercial real estate can be complicated, but it is a necessary tool for businesses of all sizes. Commercial real estate loans can help you secure the funding needed to accomplish business goals and maintain the cash flow.

If you require commercial financing to purchase land or develop a business property, speak with a real estate attorney at Perigon Legal Services. We provide personalized guidance and advice to help you make the right decisions. Call us today to schedule a free consultation.

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