If you are about to venture into the world of commercial property investment, there are chances that financing might look daunting. We have discussed some essential tips to help you get a commercial loan for office, retail, multifamily, hospitality or a specialty property in Colorado.
Know your property’s value
Lenders consider those borrowers somewhat unprofessional who believe that their real estate is of exceptionally higher value than that of market prices. Try to be informed of current market and able to substantiate value. Whether you have a few sales comparables to help back your claim of value, or the property had some extraordinary one-time expenses that can be explained for lower financial performance.
There are three ways of valuing a property: Sales Comparison, Income Basis, and Cost Capitalization. Usually for most existing, income producing properties, the valuation is going to be weighted toward the Income Approach. Essentially how much annual Net Income the property is producing in past year, and/or how much it can be capable of producing after renovations. Net Operating Income otherwise known as NOI is a key for many underwriting qualifications and will often determine whether a loan is “bankable” or if the loan will fall to bridge and hard money lenders qualifications.
Sales Comparison approach can be helpful to determining current cap rates in a market, and gauge investor appetite for type of product. It is most oftenweighted in for “For Sale” product, such as Bulk Condos, Residential Lot Subdivisions, etc.
Cost Approach are used to figure out replacement cost of a property, and can also be used for to verify budgetsof development projects and within norm standards for current construction material and labor market conditions. It can also give an indication in recessionary times to value properties that might be temporarily distressed due to macro conditions, and or third party issues out of owner’s hands.
These three methods are used by appraisers and commercial real estate broker via price opinions to identify the value of a property.
Identify the loan servicing capacity
Loans can be underwritten using the cashflow/NOI of the subject property. A Debt Service Coverage Ratio is determined as a qualification for certain lenders. For example, the best rates offered by an insurance company may require a 1.3 DSCR or higher. For a local bank it might be 1.2 for a permanent loan, 1.0 for a mini-perm, etc. Bridge lenders on a value-add might not require much debt service, and may offset the debt service required with an interest reserve built into the loan to allow the property to cover its interest payments during lease-up. Hard Money lenders can take on vacant properties with no cashflow. In some instances, global income within a portfolio of properties can be considered to qualify for short fall in DSCR requirements. I have brokered deals to banks based on existing portfolios of real estate to help borrowers qualify for fairly attractive terms on a distressed asset acquisition.
Have a corporate structure available
Especially important in underwriting global financial capacity for a given loan, it becomes easier for the lenders to understand the business structure and percentage of ownership on an asset if you present it in the form of corporate structure diagram. It saves you a lot of time that is, otherwise, wasted while seeking the approval. Usually, commercial borrowers have corporate structures involving family trusts, associated businesses, and special purpose property vehicles, to name a few.
If you are seeking a retail, office,or hotel lender in Colorado, check this link for details: bracorealtycapital.com.