Phoenix Commercial Property Lending: A Primer.

By sonoran • July 28th, 2008

When we plan to buy a commercial property we must keep in mind that there are significant differences between the most common transaction on the market – single family residence, and multi family building, or a commercial site.

Generally we can distinguish two kinds of commercial property.

First type is income producing, and the other is an owner occupied property. 

An income property produces rental revenue, which is called a rent.  Usually the rent is a source of a mortgage loan repayment.  In the order to qualify for a loan, the rent income must support a loan amount.  The borrower is usually considered a secondary source of repayment.  What lenders consider as primary factors in assessing the quality of the property are the net operating income and the debt coverage ratio.

The other important information lenders seek are: how long are the leases, who are the tenants, what is condition of the property.  Especially in today’s market conditions banks are looking for a high quality deal.

The owner occupied property is a place where the borrower conducts his business.  In such case owner’s enterprise must bring enough income revenue to qualify for a mortgage.  The information the lenders look for in this case is a little bit different.

The most important factors are the quality of the property and quality of the business conducted by the borrower.  Bank has to have a guarantee that the owner has an ability to repay the debt.  The business must be well established, and has to document a sufficient historical cash flow.

In assessing a quality of the property a physical quality is only one of the factors taken into consideration.  The risk of the enterprise is also important issue.  The banks like multi family and industrial buildings because they offer stable income with very little risk.  The other common property types we should have no problems to qualify are office condos, flex spaces, retail strip centers, mini storage facilities.  But there are other types that pose a greater risk to the lender.  Those difficult to lend property types might be a gas station – poses environmental risk; a hotel, a motel or an assisted living facility – single purpose property.  Even restaurants and bars are included in to this property type.  In the last case a cash flow is difficult to prove, and there is no collateral. Usually the lenders require a significant down payment in that type of transaction. 

Another important facet of commercial property transaction is an appraisal.  The inspection must be ordered by the bank. But the worst thing is the fact it is very expensive. The usual fee is $1,500 – $5,000, and must be paid up front.  Naturally there are much more issues to the commercial property transaction, but these will be covered in the future.

If you have additional questions about financing call.  Ralf Sztorc, 623.388.3798

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