How To Get Commercial Loans for Commercial Rehab Investment Projects?

by Olivia Clark Finance Manager

A commercial mortgage is a loan made on commercial real estate by taking the property as collateral. The borrower is usually a company or a business, not an individual. The business can be either a partnership, a limited liability company or a corporation. Therefore, credit history assessment is more complicated with this type of mortgage. You can also expect that commercial loans rates are significantly higher than residential rates because of higher risk.

Types of Properties:

Some properties can be classified as commercial properties. It is therefore important to identify exactly what type of property you want to finance.

A residential real estate can be financed under a private residential real estate loans if it is an income property. This can be in one of these three categories:

Pure residential, 1 to 4 units
Pure residential, 5 units or more
Residential and mixed commercial

There are some other properties that fall into the commercial loans category. You will consider hard money loans for real estate, if you are looking to finance an office building and commercial or industrial real estate.

Types of Commercial Hard Money Loans:

Commercial Loans for office
Commercial Loans for warehouse
Commercial Loans for mixed-use
Commercial Loans for industrial sector
Commercial Loans for healthcare and special purpose investment projects

For commercial loans, it can be difficult to compare rates since loan criteria are usually not displayed, and terms & conditions may differ significantly. It is advisable to obtain the services of commercial hard money lenders. A commercial money lender usually deals with the case of an office building, industrial and retail properties, and apartment rentals. They can usually put you in touch with a number of fix and flip lenders who can meet your needs. A lender assesses the risks associated with individual property.

For example, a mixed property could be hosted a store but have 2 or 3 floors of residential properties above. The risk of property increases if the business area of a property is greater than the residential area (in square feet). Commercial properties are considered riskier since repayment depends on the performance of the business.

Qualification Criteria: If you choose to take a commercial loan, there are specific criteria that you will have to satisfy. The bar is set quite high since the value of these loans is much higher.

Debt Service Ratio: This is the primary criterion that lenders value and essentially represents the ratio of cash available to make loan payments. Most lenders who apply the loan-to-value ratio calculation expect that you invest some of your own money in the purchase to reduce the risk.

Credit History: Most residential & commercial hard money lenders require a good credit score, as well as proof that your business is solvent. There are lenders who can accept candidates with less-than-perfect credit history, but they are few in number.

The Current State of the Business: If your business is operating, commercial lenders expect it to be profitable and stable. You may need to provide your business plan with your financial forecast to the lender to ensure that you will be able to make your payments on time. Some lenders may have a minimum requirement for the net worth of the business. The funds must be 'cash' and not equity, so we are talking about RRSPs, cash, securities, etc

Business Type: The terms of a commercial loans depend on the type of business as well as the type of property you want to buy. It can be a rather complex subject so it is advisable to contact a specialist, a lawyer or a surveyor to advise you.

Deposit: A higher down payment is required for a commercial property. A typical down payment on a mixed property falls between 20 and 35%. A pure commercial property is generally higher, with a deposit of nearly 50%. Your risk profile directly determines the size of the down payment required from you.

Commercial Loan Brokerage Fees: If you use a commercial loan broker to help you get in touch with the best hard money lenders for the affordable interest rates, the broker will charge you for his brokerage fees. This can cost customers a few thousand dollars. Some of the best commercial mortgages are now offered by private funds such as pension funds, credit unions, and private lenders.