How a first time commercial real estate investor can get approved for a commercial mortgage. Hint: it's not the same underwriting as residential mortgage loans!
A frequent question our StackSource team receives from new borrowers is:
“I’ve had many residential properties but this is my first commercial purchase. What do I need to know in order to finance my first commercial property?”
So we decided to give you a simple overview of what you should expect to know when you’re looking to finance your first CRE deal.
This blog is a collaboration between StackSource teammates, Omar Sobhy and Huber Bongolan, to offer you some insight into what we advise our clients to look out for.
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Explain this to the lender in a professional manner and make sure they fully understand and buy into your business plan.
How will this property perform as an asset? Specifically, how much net operating income or cash flow will it produce in the future and what are the certainty of those cash flows?
Lender’s first priority is understanding the asset they will be lending on. Specifically, they will need to know the cash flow from the P&L (profit & loss) of the property. P&L’s generally will include: operating revenue and operating expenses from the asset.
Lenders will usually look at the last two years of annual P&L’s and a year-to-date monthly P&L to really understand the operating history of your property. Lenders will also compare your P&L’s to those of similar assets in the same submarket. This will help lenders compare where your numbers are within the competitive landscape and this will also allow lenders to make accurate projections for your assets future performance.
The bottom line for lenders is determining the certainty of future cash flows. The more certain and attractive your future cash flows are, usually the more attractive your loan terms will be. The more uncertain your future cash flows are, the higher the risk of your deal, and therefore lenders will seek higher returns.
Here are some important metrics you might get asked about when lenders are looking at your P&L’s and projections:
Here is our previous blog for a full list of Commercial Real Estate key terms.
How are global and national economies doing? Does your asset class have a strong outlook? Where does region’s economic drivers fit into the big picture?
The deal and the type of lender will determine how many of these reports will be required.
Expect the lender to choose these companies and individuals, so don’t pull the trigger too early by getting all of these reports before you have a lender in place. Most likely the lender will make you get these reports from their trusted and approved relationships.
Lastly, expect to pay for these reports as a borrower. Lenders will collect a deposit upon signing the term sheet to use as an expense account.
Yes, your strength as a borrower matters with respect to commercial real estate financing. Lenders will want to see that your liquidity is strong enough for you to finance the acquisition. That means whatever the down payment is, you will need to be able to show the cash available to make that down payment whether it’s from you or a combination of you and your partners in the deal.
Some lenders will want to see your credit score, tax returns, and understand your income to help them get comfortable.
Some additional borrower-specific questions could be:
This is a more unique aspect.
All of these are different potential stories that would help the lenders understand why and how you’re purchasing this asset and potentially help them feel more comfortable lending to you.
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Good luck out there friends.
We’re happy to engage with you in the comments so that everyone can learn. Please share your thoughts and questions and if you prefer to share privately, feel free to email us at omar@stacksource.com and huber@stacksource.com.
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StackSource is a tech-enabled commercial real estate loan platform. We connect investors who are developing or acquiring commercial properties with financing options like banks, insurance companies, and debt funds through a transparent online process. We’re taking the best of commercial mortgage brokerage and updating it for the 21st century. Learn more at StackSource.com.