Commercial Real Estate Loans

Doing business is impossible without a convenient office, a spacious warehouse or a well-equipped retail outlet – all these objects belong to non-residential real estate. Some business entities formalize lease relations with the owner of the premises, but many merchants come to the conclusion that it is better to pay a commercial real estate loan than to pay the lessor for renting the premises necessary for commerce. After all, after you repay the loan, you will become its owner, and this opens up completely different opportunities – you will be able to rent it out and receive regular passive income.

Features of a commercial mortgage

Real estate objects are valuable assets of enterprises, but in order to acquire them, you will need considerable amounts, and sometimes borrow funds. Therefore, a commercial real estate loan for citizens and individual entrepreneurs allows you to immediately become its legal owner, although it also has its own characteristic features. Recently, only legal entities could get a loan for the purchase of commercial real estate: large and small industrial enterprises, associations of shareholders or companies, but the policy of lenders is gradually changing. In the current economic conditions, an individual can conclude a commercial mortgage agreement, although many financial institutions prefer people who are engaged in some type of business and receive a regular income.

Citizens or individual entrepreneurs, as well as representatives of small businesses, can buy get a commercial real estate loan:

  • for the provision of administrative services to the population – for the issuance of certificates, extracts, various kinds of documents;
  • for trading activities with the aim of organizing small food outlets;
  • to open your own private production – sewing clothes, shoes, leather goods, etc .;
  • to create workshops for consumer services – repair of household or computer equipment, hairdressing salons, beauty salons, clothing and footwear repair shops, etc.

In fact, there are many options for running a private business, and a separate room is needed for any economic activity.

However, young novice businessmen find it difficult to do without loans, and in order to eventually become the owner of the chosen premises, they may need to resort to mortgage lending services. But lenders issue loans commercial real estate loans – for the real estate being purchased or already in the asset.

Terms of commercial real estate loans

Although the principle of getting such a loan is not much different from a usual mortgage, there are still some differences. Lenders can expose clients to different conditions for getting borrowed funds – this may be the difference in interest rates for using other people’s funds, the duration of the loan agreement, strict requirements for real estate or the borrowers.

But there are standard conditions that are common to many lenders. A business loan can be issued on the following terms. The object of mortgage lending can only be a capital building. Funds can be issued both for a newly built structure and for a secondary housing. No third party claims or court arrests are allowed in relation to the subject of the loan. An applicant for a loan is obliged to prove his or her solvency, and his or her income can be calculated both in real money and the presence of liquid assets or another real estate that can be sold in case of non-fulfillment of the terms of the agreements reached. Moreover, the income should be sufficient for timely settlement with the bank. Many financial institutions issue loans only on condition that the property purchased with collateral is insured against fire, damage, or total loss as a result of an unforeseen event.

The bank can have special requirements for non-residential premises.

The main requirements may be:

  • real estate must be located in the region where the lender has a branch;
  • the object must be located on the first or basement floor of a building if it is not an integral structure with an area of at least 150 square meters;
  • the property must be equipped with a complete communication network (water supply, heating, sewerage and lighting);
  • the property should not be in disrepair or be registered for demolition;
  • the premises must have a specific mailing address;
  • real estate must comply with the explication.

The age limit and other requirements are also important.

Many creditors set certain restrictions:

  • the applicant must be a citizen of the United States;
  • age from 21 to 65 years;
  • be a private entrepreneur or company owner.

In other cases, creditors may demand that the purchased real estate conforms to the nature of the client’s commercial activity – if the main activity is production that is harmful to human health, then he or she may not receive approval for the purchase of premises on the first floor of a residential building. In addition, a commercial mortgage differs in terms of conditions from the purchase of residential real estate – the terms for concluding an agreement are much shorter, and lending rates are higher. This is due to the increased risk for the bank – if an apartment can be quickly sold and loan funds returned, then non-residential premises suitable for one type of economic activity may not be suitable for another type of commerce at all.

Where to get a commercial real estate loan?

Not every credit institution offers commercial lending programs for individuals since this type of financial activity is at the stage of intensive development. Therefore, only large creditors can offer such agreements since they have the necessary amount of working capital. Events can develop in different ways, for example:

  • Option number 1. The parties come to an agreement on mortgage lending and conclude a deal: the client pays a part of the price of the object; then the property is registered as the property of the entrepreneur; it is provided to the bank as collateral; the lender issues a loan for settlements with the seller.
  • Option number 2: the parties conclude a preliminary agreement on the purchase of real estate; the purchaser pays part of the transaction amount and concludes an additional agreement with the bank; such transactions are registered – between the lender and the client (loan agreement), the contract for the sale and purchase of a non-residential real estate object and an agreement on the transfer of the object as collateral; after entering transactions in the register of immovable objects, the lender provides the borrower with the missing part of the funds for the purchase of premises.
  • Option number 3: the owner of the premises is transferred to the status of a legal entity; the client submits an application to the creditor for the purchase of the company’s shares; then the property is registered to the buyer; the borrower is given the lender’s funds to buy out the company and repay the mortgage loan. Financiers can work according to one of the proposed options – an individual can independently choose the most convenient lending option.

Advantages of a commercial real estate loan

Commercial real estate loans, despite some difficulties in obtaining and registering it, have a number of important advantages:

  • the premises are immediately registered by ownership;
  • the rent for the use of the premises no longer plays any role;
  • the possible receipt of passive regular income from the lease of non-residential real estate by the right of a lease to other merchants;
  • the company has a higher business rating because only part of its own funds is used for the transaction;
  • money remains in the company’s turnover, which has a positive effect on business development.

However, such results can only be obtained by those individual entrepreneurs whose profitability indicators exceed loan payments. although a merchant will be able to expand his or her field of activity at any time.