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Commercial Real Estate Financing Options

Brokers and bankers are more likely to approve a business loan if your business has a history of profits stemming from a solid cash flow, promising cash flow forecasts, a healthy balance sheet, a strong management team, business plan, and evidence of succession planning.

Pretty simple, right?

We know not everyone can check all the boxes at once, so whether you’re moving into, renovating, leasing or buying commercial real estate, it’s crucial to understand the variety of financing options that may be available to you.

Here are 6 financing options to know about when leasing or purchasing commercial real estate.

1. Mortgage Loan

If you’re reading this, I’m positive that you have heard of a mortgage loan. It’s the most common type of financing available for a commercial real estate purchase. That being said, you also know that the interest rate is important to consider, but there are other terms you may not be familiar with that can also be critical to the success of the purchase.

One of the most important terms is the LTV or loan-to-value ratio, which is the portion of the property’s value that the bank will finance. Banks generally offer to finance 70-75% of the value of a commercial real estate transaction, depending on the building’s condition, resale ability, income, and various other factors. A higher loan-to-value ratio means less money out of your pocket.

A second variable is the amortization period. This usually ranges from 15 to 25 years for commercial real estate, although recently I saw 35 years for a multi-family property. Longer terms mean higher cash flow and potentially a much more appealing investment. A longer amortization period may be preferable because it means more money stays in your company’s hands now while your payments are lower.

It may also be possible for a lender to roll some of the renovation costs into the mortgage loan, particularly if they add value to the property.

2. Leasehold Improvement Loan

A leasehold improvement loan is a short-term loan (often amortized over about five years) that you can use to pay for renovations to a leased space. Depending on the value of the improvement, a bank may accept the improvement as collateral for the loan. This could result in a lower interest rate than that of an unsecured loan.

3. Equipment Loan

If you’re planning to buy equipment for your new space, an equipment loan may be useful. This type of loan is usually amortized over the life of the equipment—typically, 5 to 12 years. The equipment acts as security for the loan.

4. Demand Loan

A demand loan has no fixed maturity date. You can renegotiate it as your business situation changes, providing you with added flexibility. You also have the option to pay back the loan in full or in part at any time, without penalty. But be careful, because the lender can require full repayment of the loan at any time.

Demand loans can be useful for covering the immediate cost of a move, buying equipment or covering a temporary cash shortfall.

5. Line of Credit

This is a short-term, flexible loan that you can tap into quickly during a sudden crunch for cash or to fund renovations.

6. Seller Financing

An eager property owner may offer seller financing to a buyer to help ensure the sale goes through or help a buyer who would otherwise not be able to buy.

With the number of options available to you, knowing they exist is one thing, but making the right decision for you and your business is another. If you’re looking for a valuable resource who provides you with the guidance and support you need to acquire your next commercial real estate investment, contact Tru Realty’s Commerical Divison at Heather@TRUcre.com or call 602.339.3993.


 About the Author

Heather Binder is an accomplished real estate professional with Tru Realty in her role as the Director of the Commerical Division. She is dedicated to providing her clients with an extraordinary real estate experience. Her expertise in working with clients made Heather a natural for her role as a certified instructor at the Arizona School of Real Estate and Business.

Heather’s 20+ years of industry experience—as a real estate agent, instructor, Managing Broker, and Designated

MORE ABOUT HEATHER >Broker—has given her a clear understanding of the buying and selling process. Her superior knowledge and passion for real estate make her an extremely talented.

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