The commercial real estate lending process follows a set order. You speak with a lender, share your financial information, and review proposed terms. Then the bank studies the property and your business before you close. Knowing that order up front saves you time and effort.
Maybe you run a dental practice in Mason and you’re tired of paying rent. Or you own a small apartment building in Lebanon and want to refinance it. The same path applies whether you’re a small business owner buying a first building or an investor adding a real estate investment property. This guide covers each stage of a commercial real estate loan. It also explains the guidelines banks use to evaluate a request and the loan terms you should understand before signing anything.
Key Takeaways
- The process moves from a first conversation to an application, property reports, underwriting, and closing.
- Banks assess whether business or property income can cover the loan payments with room to spare.
- Loan-to-value compares the loan amount to the property’s worth, but it is only one factor.
- The loan term and the amortization schedule are separate numbers, and the gap creates a balloon payment.
- Ready tax returns, financial statements, and property details help your commercial banker move the file forward.
What Is Commercial Real Estate Lending?
Commercial real estate lending is financing for property used for business or to earn income. It covers buildings an owner occupies, property leased to tenants, and construction projects. The property usually secures the loan as collateral, and the bank records a mortgage against it.
At 1st National Bank, business owners can purchase or refinance commercial real estate. Financing is available for commercial properties such as office buildings, retail space, multifamily housing, mixed-use properties, and owner-occupied buildings. Planning to build instead? That calls for construction financing.
A commercial mortgage is not the same as a home mortgage loan. In addition to looking at your personal pay cheque, the bank also considers the income from the property and the finances of your company. It also differs from a business line of credit, which usually covers everyday cash needs rather than the building itself. Are you new to taking out a business loan? Start with this guide to commercial lending.
How the Commercial Real Estate Lending Process Works
The commercial real estate lending process has seven stages. Each stage depends on the one before it, so a gap early in the loan process can slow everything after it.
- Talk with a commercial lender. Share what you want to buy or refinance, the purchase price, and how the property fits your business plan. 1st National Bank focuses its lending on Butler, Clermont, Hamilton, Highland, Montgomery, and Warren Counties.
- Share early financial information. Your lender reviews basic numbers to see whether the request could qualify for a commercial loan at the size you need.
- Review proposed terms. Before full underwriting, a lender often outlines the proposed loan amount, loan structure, and repayment terms. This outline is not a final approval.
- Complete the loan application. Expect to provide tax returns, financial statements, and property details such as the purchase agreement. For a building with tenants, the bank may ask for lease information.
- Order third-party reports. The bank arranges an appraisal or evaluation to set the property’s worth. It may also require title work, an environmental review, proof of insurance, and a zoning assessment
- Underwriting and approval. Underwriters evaluate cash flow, collateral, credit history, and any guarantors. The request then moves through the bank’s internal credit approval.
- Sign and close. You sign the loan documents, and the mortgage is recorded with the county recorder. Ohio recording fees can vary by county. Ohio Revised Code 317.32 sets the base fees and lets each county recorder add a document preservation surcharge.
A missing document or a late report can hold up the whole file. Be sure to answer your lender’s questions promptly during the application process, and keep copies of everything you send.
What Commercial Real Estate Lending Guidelines Do Banks Follow?
Banks follow written lending policies built on federal real estate lending standards. Those standards list the credit factors behind a sound loan. This includes the borrower’s ability to repay, the value of the property, and the borrower’s creditworthiness. Also included is the invested equity, as well as any additional collateral or guarantees. Each bank determines its internal loan limits by property type. The Interagency Guidelines for Real Estate Lending say those internal limits should not exceed the federal supervisory limits.
Cash Flow and Debt Service Coverage
Can the income cover the loan payments? Lenders often use the ratio of net operating income to loan payments to answer this question. It divides net operating income by yearly loan payments. A higher ratio means more cushion if income dips.
Loan-to-Value and Equity in the Property
Loan-to-value compares the loan amount to the property’s appraised worth. For a purchase, federal guidelines use the lower of the purchase price or the appraisal or evaluation figure. More equity in the property lowers the ratio. Still, the guidelines call loan-to-value just one of several credit factors.
Credit History, Collateral, and Guarantees
Your credit history and credit score show how you’ve handled debt in the past. The bank also looks at your operating history. Owners are often asked to personally guarantee the loan, which means you promise to repay if the business can’t.
Commercial Real Estate Lending Terms to Know Before You Sign
Your loan terms set your payment, your total cost, and what happens when the loan ends. The interest rate matters, but it’s only one line in the agreement.
- Loan term: How long the loan runs before the remaining balance comes due. Commercial loans often carry shorter terms than home loans.
- Amortization: The schedule used to figure out your payments. If the payments don’t fully pay off the loan by the end of the term, a balloon payment in a lump sum is due. Commercial real estate loans typically carry balloon payments.
- Repayment terms: How often you pay and how each payment splits between principal and interest.
- Interest rates: A rate may stay fixed for a set period or adjust based on the loan agreement.
- Prepayment terms: Some agreements include fees or conditions for paying off the loan early.
- Covenants: Ongoing promises, like sending the bank updated financial statements on a set schedule.
Ask your lender to walk through each term with you. A brief conversation now can help you avoid surprises at maturity.
Talk With a Commercial Lender About Your Property Plans
Buying or refinancing a building is a big step. Knowing what’s coming makes the ride easier. You’re in a better place with strong financials, a solid property plan, and a close read of your loan terms.
Ready to talk about commercial real estate financing? 1st National Bank has banking centers in Centerville, Lebanon, Liberty Township, Maineville, Mason, and Morrow. Call (513) 932-3221 or contact us to start the conversation with a commercial lender.
Frequently Asked Questions
How long does the commercial real estate lending process take?
Well, there’s no single timeline. The pace depends on how complete your application is, how long the appraisal and other third-party reports take, and how involved the property is. One practical way to avoid this is to have your tax returns and financial statements ready before your first meeting.
Is a commercial mortgage the same as a residential mortgage loan?
No. A home loan is based mostly on your personal income and credit. A commercial mortgage is underwritten on the property and the business, including cash flow, value of the property, and financials of the company. The documents are different as well. But your personal credit does count, especially if you are the loan guarantor.
What is the difference between loan term and amortization?
The loan term is how long you have until the loan matures. Amortization is the schedule that tells you about your payments. The longer the term, the smaller each payment, but a balloon payment for the remaining balance is due at maturity. Put that date on the schedule well in advance.
Do I have to personally guarantee a commercial real estate loan?
Yes, a lot. Often banks require the business owners to personally guarantee the loan. A guarantee is your commitment to pay the debt if the business defaults. Requirements will vary depending on the deal, borrower, and property. To avoid any surprises later, discuss with your commercial lender in advance how a guarantee would relate to your request.
What documents do I need to apply for a commercial real estate loan?
Start with tax returns, financial statements, and property details, like the purchase agreement. The bank will also look at how you’ve operated in the past and your plans for the property. If the building is rented, lease info is helpful. Your commercial lender can tell you exactly what your file needs before underwriting begins.
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This article is provided for general informational purposes only and is not intended to constitute financial, legal, or tax advice, or an offer or commitment to lend. Loan products, terms, rates, eligibility requirements, collateral requirements, and availability may vary and are subject to credit approval and applicable underwriting standards. Additional terms and conditions may apply. Contact a 1st National Bank Commercial Lender for information regarding your specific financing needs.