December 6, 2024

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Important Things To Know About Commercial Real Estate Loans

Important Things To Know About Commercial Real Estate Loans

Commercial real estate loans are considerably different when compared to residential loans. They actually are much more complicated as they carry terms and conditions that are very different when compared to that of residential loans. This is one of the reasons that most of the investors fear to venture in the commercial real estate market.

Smaller investors of residential real estate are typically limited to somewhere around four to ten properties that are valued in between hundreds and thousands of dollars before the lenders conclude that it’s the sufficient risk level and no further loans will be made. The loan requirements for commercial properties can significantly vary between the private lenders and banks. Also, the loans that are held in the portfolio of a single lender may vary based on the risks perceived by the lenders.

Commercial Bank Loans

Normally, the banks want you and you and your partners to come up with a minimum of about 20 – 25% of the property value as the down payment. For instance, if the property value is about RS 4 Cr, you’ll have to contribute about RS 80 Lakh- 1 Cr as the down payment. Also, the recent researches have shown us that, most of the businesses have failed because of the lack of adequate capital to meet the needs.

For that reason, banks often require the business maintain a significant cash reserve that can be drawn on if cash flow is not adequate to make the loan payments. This financial requirement is in addition to the hefty down payment. One strategy that some commercial investors use is borrowing as much money as they can (even at a higher interest rate) to provide ample capital to build out the business and thereby increase cash flow.

Private Commercial Loans

Private lenders or the non-bank lenders typically offer less rigorous requirements for commercial loans. There are a few lenders who require lower down payment (range of 10-15%). These lenders often agree to carry to the loan amount up to 20 or 30 years until it’s paid completely (in most of the cases). However, they charge the slightly higher interest rate when compared to banks (1% or 2% higher than bank rates).

But when you do all the maths, the higher interest rate might not look very expensive as it appears the first time. Calculate the cost of higher interest over the period of loan and compare it with the cost you pay to open a new loan (2 or 3 times as the balloon payments come due).

The emergence of private or non-banking lenders is challenging the banks on their traditional terms of loans. While the banks are continuing to tighten the requirements to sanction the loan, these private lenders are moving towards a larger share as it is making it easier to qualify. So, if you are looking for a smaller commercial loan (less than 15 Cr) or a medium loan amount (less than 35 Cr), consider taking your time so that you can find the lenders who can offer you the acceptable time and term constraints.