Just the Peaks

This newsletter at a glance

  • There are many types of commercial loans for hopeful investors to consider
  • Today’s lenders are judicious, so be sure to assemble a solid application  
  • Everest explores what’s hot in commercial lending—and how to impress!

Has commercial real estate been calling your name? 

Everest helps you break into CRE investment the smart way. 

This month, we’re tackling all things commercial loans.

Surely, commercial real estate is one of the most lucrative and rewarding ventures for investors to consider. From office to industrial to retail to multifamily, these property types offer a long list of advantages through income generation and price appreciation. CRE investors also diversify their portfolios and enjoy favorable tax treatment.

Yep—CRE is where it’s at!

But because market risk and other pressures always exist, here at Everest, we want our clients to also invest in a healthy education. If you’re looking to finance some kind of commercial real estate, it’s good to know how these properties are defined; what kinds of loans are available to investors; and the types of ventures today’s banks are most interested in lending on.

(We’ll try to keep it simple!)

Welcome to commercial lending 101.

 

Lesson 1: What constitutes commercial real estate?

Technically speaking, CRE is any property built on land zoned for commercial purposes. Examples include offices, industrial warehouses, storage units, retail stores, parking garages, as well as multifamily apartments. Although the latter may also exist in residential or mixed-use zones, they’re still underwritten as commercial financing (more on that in a moment!).

In addition to these properties all facilitating some kind of business activity, CFI notes, “The common thread among all forms of CRE lending is that physical property serves as collateral to secure the credit exposure.” 

Lesson 2: What kinds of commercial loans are out there?

The big American banks that offer home mortgages (such as JPMorgan Chase, Bank of America, Wells Fargo, and Capital One) lend on commercial real estate as well. Aside from banks, credit unions and private equity lenders are also financiers of commercial real estate. 

According to Reonomy, “Lenders might also include other large entities like insurance companies or property investment firms—MetLife and Prudential serving as prominent examples.” Regardless of the lending institution, the types of loans made available to you will be determined by your specific property and financial needs. Your Everest loan officer has deep knowledge of this area and will sit you down to discuss the ins and outs of commercial lending.

For today’s crash course, consider these common loan types:

  

  • Commercial Real Estate (CRE) Loans are typically used by investors looking to purchase an existing occupied asset with positive cash flow. Eligible properties include multifamily housing, hospitality, medical, office, and more. Conventional commercial real estate loans break down further into “owner-occupied” and “income-producing.”

  • Commercial Construction Loans are a kind of lending specifically used to help develop and redevelop physical structures (before the business is up and running). Credit is deployed in stages as the project advances, and repayment of the loan is made in full at the time of completion (typically taken out by a conventional commercial mortgage).

  • Commercial Bridge Loans are sources of short-term capital often used for debt service until an owner improves, refinances, leases, sells, or otherwise completes a property transaction. Although bridge loans are riskier and thus come with higher rates and fees, they still serve as an important source of commercial funding.

  • Commercial and Industrial (C&I) Loans are business loans for purposes other than real estate and are mostly used for working capital, capital expenditures, refinancing, and other needs. Collateral for these loans is slightly different and may include purchased equipment, inventory, accounts receivable, etc.

Information provided by Assets America, CFI, and Reonomy

 

 

Lesson 3: What kinds of loans are today’s banks lending on?

  

Even with the strongest business plan, investors may be worried about perceived industry challenges. Rising interest rates, office vacancies, and general market uncertainty are clear sources of stress for people looking to invest.

“The effect is likely to put a chill on lending, experts say, which will make it hard for developers to borrow money to build shopping malls and office towers and could spill over into wider markets,” writes Ephrat Livni of The New York Times.

The headlines may paint a grim picture, but keep in mind—your friends at Everest have seen this before! Temporary economic obstacles do not change the fact that commercial real estate remains a highly appealing asset class for its consistent returns, passive income, and incredible growth potential. And yes—funding is still out there!

With the right circumstances, it’s possible to secure any of the aforementioned commercial loans and beyond. Bank preference may ebb and flow with the times, but loan availability really boils down to risk exposure. Borrowers who present a complete, compelling application will always be perceived as more reliable (AKA application approved!).

And so, what’s “hot” really has to do with what’s potentially successful—both the income-producing property and the person looking to purchase it. Of course, an experienced loan officer can guide you through the application process and also recommend products that are trending among lenders. 

For instance, Rose Schwartz, Senior Loan Officer at Everest Equity, noted a greater interest in multifamily and C&I loans in recent months. Things are always changing, so it’s best to check in with your mortgage team often. 

Lesson 4: How can I make a favorable impression?

To conclude today’s seminar, we’re taking a cue from our friends at Asset America. Here’s a simple list of 5 keys to success when it comes to applying for a commercial real estate loan.

Get started on your dream investment today!

How to Boost Your Credibility with Commercial Lenders

Tip #1: Document your success

Oftentimes, lenders are impressed by borrowers who have shown past success with smaller projects (perhaps financed through a small business loan). When you move on to the next venture, don’t be afraid to go bigger! In addition to establishing good credit and presenting your financial history, telling the story of your business can be very persuasive. 

Tip #2: Show skin in the game

When applying for a larger commercial loan, lenders want to see that you have a sizable stake in the project. Be prepared to contribute more, even if it means bringing on a team of investors to boost your equity capital. Putting in more cash instantly increases your lendability. 

Tip #3: Know your assets

If you’re going for a construction or C&I loan, you may find it difficult to get together the necessary collateral. It’s important to understand that your brilliant business plan and/or creditworthiness aren’t always enough to seal the deal. Securing a loan is much easier when your collateral is concrete, so look for creative solutions (loan officers are really good at this!).  

Tip #4: Get your facts straight

This is where our Everest experts come in handy! Successful applications must be clean, clear, and professionally written. Details should be exceedingly accurate and thorough. And required documentation must be 100% complete in order to make a positive impression.

Tip #5: Prepare for scrutiny

Commercial borrowers are subject to lenders’ due diligence. A team of people will be working behind the scenes to investigate all aspects of the project and your financial fitness. Get ready to defend and demonstrate all claims made on your application. Don’t worry—you got this!  

Everest says: “Denied” is not in our vocabulary

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