This article is intended to provide a general introduction to some of the factors involved in purchasing commercial real estate.  This topic is very broad in nature and certainly cannot be covered in its entirety in a single article.  For further information, please contact Adam Quinlan at (401) 345-6672 or visit us online at www.quinlanmortgage.com.

What types of properties are typically financed through commercial lending?

Commercial real estate typically consists of properties that are zoned for commercial use.  These can include:  (a) mixed use properties, or properties that consist of residential and commercial units, (b) anchored shopping centers, or properties that have established a large tenant such as a supermarket or department store, (c) strip centers, (d) office buildings, (e) warehouses, and (f) public storage.   Commercial real estate lenders also finance apartment complexes with 5 or more units.

What are commercial lenders looking for when evaluating a property?

In residential lending, lenders are interested in borrower-specific information, such as income, monthly debt, cash reserves, and credit history.  Commercial lending takes a property-specific approach.  This means that a great deal of underwriting for a commercial mortgage is focused on the condition of the property, the location of the property, and the ability of the property to produce adequate income to repay the debt of the new mortgage. 

Debt-servicing, a term commonly used in the commercial real estate field, refers to the ability of a property to pay for itself.  Lenders will often calculate a “debt service coverage ratio”, to determine if the income from a property can cover the principal and interest payments on the loan. The debt service ratio of a property is determined by taking the gross annual rental income, subtracting the annual operating expenses, and dividing this by the annual principal and interest payments for the loan.  Lenders are typically looking for a minimum debt service coverage ratio of 1.25.

A core principal in lending is an evaluation of risk and return.  One factor that lenders will consider when assigning interest rates on commercial properties is the level of risk involved.  Type of property is one determination of risk.  Obviously, an investor looking to finance an apartment building would likely receive a lower interest rate than an investor looking to finance a facility that involves the storage of hazardous waste materials.

What types of loans are available when purchasing commercial real estate? 

Commercial real estate loans come from local and national lenders, some of which are backed and guaranteed by the Small Business Administration (SBA).  Commercial real estate loans come with a variety of options, including (but not limited to) adjustable-rate mortgages, fixed rate mortgages, interest-only mortgages, and balloon payment mortgages.   If needed, private investors can also finance commercial properties.  Commercial loans granted by private investors are often strictly based on the equity in the property, and are less driven by more conventional factors such as income.

At Quinlan Mortgage, we have access to all of the aforementioned options, including options that are beyond the scope of the current article.  As a result, we are able to offer a wide variety of terms starting at 10 years and going as far out as 40 years (to further lower the payments). 

How does the process of obtaining a commercial mortgage work?

At Quinlan Mortgage and Financial, the process of obtaining a commercial mortgage is simple. Much like residential lending, we complete an application and obtain borrower credit history.  We also obtain information about the income and expenses associated with the property, and complete an environmental questionnaire to determine if there are potential environmental issues on the property (e.g., presence of hazardous materials).  After an initial review of this information, we order an appraisal.  Supporting documentation is then collected as required to process the loan, which could include a purchase and sales agreement and financial information for the borrower or borrowing entity (e.g., tax returns).  Once the title has been verified and all insurance requirements have been met, the closing is scheduled.  At Quinlan Mortgage, this process is fast, averaging 30-45 days from the date of the appraisal.

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