You started a business a few years ago and you have had some success. Your business has been growing and you are looking to take that next big step.
You start to think about purchasing a commercial property for your business. You figure why should you be leasing when you can own your property.
The idea sounds great, but where do you begin?
1. Get Your Financial Paperwork in Order
Banks are going to want to see the following items.
- Personal Financial Statement: Depending on the bank this will need to be filled out for every owner with 20 percent or more ownership in the company. Some banks will go as low as every owner with 10 percent or more ownership.
- Last three years personal tax returns
- Last three years business tax returns
- Last three years year end P&L’s: These P&L’s have to match your tax returns. If you are showing 500K in revenue on a tax return and only showing 300K on your for that same year P&L this will not be acceptable. This may seem like a no-brainer, but it happens more often than you would expect.
- Current year to date P&L
- Current year to date balance sheet
- Business debt schedule
- Three score personal credit report: I recommend you purchase your own three score credit report online for about $10 to $30. This will save you all the inquiries from multiple lenders if you plan on shopping around. Provide them with the report and let them know not pull your credit, but to qualify you from the report you provided. Once you decide which lender you want to use for funding they will be the only lender to pull your credit.
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2. Approach a Bank or Commercial Mortgage Broker
A banker or commercial mortgage broker can review your file and give you a general idea of how much of a loan you can qualify for.
This is something you can do yourself as well by using an amortization calculator. You can insert the loan amount into the calculator and insert a term of 20 to 25 years (common commercial mortgage amortizations). Insert various ranges of interest to get an idea what the various monthly payments would be.
Take the monthly mortgage that the calculator provides you and multiply that by 12. This will give you the amount of net revenue you business will need to cover the mortgage. However, this will not be enough to qualify you. Most banks will want to see at least a minimum of 1.25-debt service. What this basically means is that for every single $1 of debt that the business has it has to be making at least $1.25.
For example, If you calculated your monthly payment to be $4,000 then you would need to have a net income of at least $5,000/month.
$4,000 X 1.25 (debt service) = $5,000
$5,000 X 12 (months) = $60,000 minimum yearly revenue
$48,000 yearly commercial mortgage requires minimum $60,000 yearly revenue
*This is a basic example and does not take into consideration taxes and insurance cost or any add backs that a business may have that can affect underwriting.
Having the necessary down payment will not be enough. In addition to knowing how much you may qualify for. You need to keep in mind that there will be additional 3rd party cost title/closing fees, appraisal, environmental report and survey report if needed. The 3rd party cost can easily cost you and additional $10,000 for a loan less than one million. As the cost of the purchase goes up, so will the fees.
Depending on the loan these can be added into the loan or may have to be paid out of pocket up front.
3. Contact a Commercial Real Estate Broker
A commercial real estate broker can help you locate a property that meets your specific needs. They will also be beneficial in helping you negotiate your purchase.
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4. Choose a Property
The property you choose can affect the type of loan you may qualify for. This is in reference to how much space you intend to occupy in the building you purchase. If you occupy 51 percent or more of the building you can possibly qualify for an SBA loan. If you want your property to generate income from other tenants in which you will only occupy a small portion of the building you will not be able to qualify for an SBA loan.
Your decision will be based on your needs and how much money you have to put down. Commercial mortgages can have down payments ranging from 10 percent to 30 percent depending on the type of loan. SBA loans usually have lower down payments.
5. Choose a Lender
The type of property you decide to purchase can affect the lender you choose to fund your loan. Not all lenders will have the same interest rates and amortization.
Lender A Offer
5.5 percent interest
25 percent down payment
Monthly payment: $2,579.58
Lender B Offer
6.5 percent interest
10 percent down payment
Monthly payment: $2,899.36
Lender C Offer
5.5 percent interest
20 percent down payment
Monthly payment: $3,268.33
Depending on your situation putting down an additional $75,000 upfront with a lower interest rate for Lender A might not be worth only saving $319.78/month, so option B might be for you. If monthly cash flow is not too much of a concern for you then Lender C’s offer will be for you.
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6. Be Patient
Keep in mind that the commercial loan process is not like buying a house. It can be very time-consuming and will require a lot of paperwork. The process can take anywhere from 35 to 90 days to fully process a transaction.
The length of time will vary between lenders, but can be even longer if any issues arise during the due diligence process. The period of time that lender tells you it will take to close the loan is from the point at which they have received all the paperwork they have requested from you.
If a lender tells you they can fund the deal in 45 days and it takes you 30 days to turn in the necessary documentation do not expect that deal to close in the next 15 days. Step one is crucial in getting your deal funded in a timely manner.