The key to obtaining good commercial building financing during the slow economy is good financial documentation for the borrower and the property in question.
During a slow economy banks and lenders tighten their money policy, which means less money is being lent overall, and the money that is being lent goes under a microscope with tougher underwriting guidelines. To get the best commercial building financing your financial documentation has to be in order.
You'll need to provide the same documentation you would provide during regular economic times, but during a slow economy the financials of the business or commercial building must be better. The documents you'll need are the following:
Personal Financial Statement
This statement shows assets, liabilities, and by resolving the them, overall net worth. The higher the net worth the better chances of getting a commercial building loan. Most lenders have rules about how much they will lend compared to the applicant's net worth. In slow economies, such as we face now, lenders looks for a high net worth to loan ratio. The higher the net worth, the more you can borrow.
Income and Expense Documents
All lenders look for income and expense documents showing how much money the building takes in from rents and leases and how much money goes out in expenses like utilities, insurance, and maintenance. Expenses are subtracted from income to derive net operating income. The higher the net operating income the better chance you stand of getting a good commercial building loan. Most lenders use a ratio called the debt service coverage ratio, which is a ratio comparing the potential mortgage on the property to the net operating income of the property. For a commercial building the debt coverage ratio used by most lenders is 1.30. That means for every dollar of potential mortgage you need 1.3 dollars of net operating income. It's essentially a buffer to ensure the building generates enough income to afford the potential mortgage.
The longer the lease agreement with your tenants the better. This shows the building will be able to generate income for longer periods of time, creating a sense of stability. The more stabilized a commercial building the better chance of getting financing through commercial building lenders. Most commercial lenders like to see lease terms of at least five years or more. If you tenants are going month to month or have lease terms under five years, as the building owner you might consider approaching them to renegotiate new leases.
Business owners who occupy at least 51% of their own building space will have additional options for commercial building financing in a slow economy. They can tap into real estate financing offered through the SBA. The SBA offers loan guarantees to their lending partners, who in turn lend to the building owner. The loan guarantee makes the loan more secure for the lender, and therefore the lenders are more apt to make the loan, even during the slow economy. The SBA requires similar documentation described above, but offers very specific loans for either the purchase of commercial buildings or the expansion of existing businesses through working capital or rehabilitation of commercial property. Commercial building owners with businesses should look into the SBA 504 program and the SBA 7A loan program. These are the two most popular SBA programs, and through local lending partners, they are great options for commercial building financing during a slow economy.