Using Commercial Real Estate Financing the Right Way: A Guide
There are many lending opportunities out there of which businesses can take advantage. The problem is that many businesses fail to learn all the subtle differences among the different financing options. This guide in particular focuses on one type of lending—commercial real estate financing—what it is and how to use it the right in order to avoid harsh penalties.
Purpose
The first thing to know about commercial real estate financing is that it is only to be used for business purposes for the following: retail spaces, such as store or malls, office buildings and complexes, and resorts or hotels. The loan can be used for all phases of the property, including its acquisition, development, and construction.
Qualifications
The second factor that is important to understand is the type of borrower of a real estate loan. Typically, the borrower should not be an individual, but a corporate entity. Examples of these entities include but are not limited to developers, corporations, and limited partnerships. They can also include funds or trusts which are solely formed for the purposes of operating commercial interests. Regardless of the relationship, these corporate entities require either a strong credit history or a guarantee against default.
Terms
Third, it is important to understand the terms of commercial real estate financing. Interest is typically higher on a commercial real estate loan to maximize the profit of the lending institution. In addition, there are also other fees, such as survey and appraisal fees or loan application and origination fees, that may be tacked onto the length of the loan. Another term included is length of the loan, which can be as short as five years to as much as 30.
Penalties
The terms of a commercial loan are often fixed for maximum gain. As such, if a borrower pays off a loan early, several penalties could be applied to the loan. One penalty involves restricting minimum payoff date, which is referred to as a lockout clause. Another common penalty is an interest guarantee penalty that pays the lender the full amount of interest for the maturity of the loan. The most common is the prepayment penalty, which means multiplying the outstanding payoff balance of the loan by a percentage rate and having the borrower pay that in addition to the original amount of the loan.
There is a lot to understand about commercial real estate include the ins and outs of financing. This guide provided an overview of what constitutes commercial real estate and who can qualify for one. Additionally, this guide also explained the terms and some of the penalties for repayment of the loan.
