Investing in commercial property may open a whole new area of financial ventures for the savvy real estate investor. Opportunities abound in multi-family units, office buildings, warehouses, retail shops, car washes, laundromats, mobile home parks, hotels, apartments, strip malls and more. 

The obtaining of commercial property financing is usually more extensive and time consuming than for a residential loan. Guidelines for underwriting a commercial loan put more emphasis on the income that the property produces than on the borrowers ability to repay the loan. Lenders rely on the income history and stability of the property to determine future income. Also considered, although less important, is the credit history, assets and financial strength of the borrower.

When applying for a commercial loan the previous two years and year-to-date financial information concerning the property need to be considered. This data is put into a format commonly known as a Pro Forma Operating Statement. This is probably to most important single document in the application process. A Pro Forma Operating Statement is the operating budget for the property which lists the rents and any other income such as laundry, parking, etc. and also all expenses from advertising to management fees to utilities. Your lender can supply you with this standard form and help you or the seller complete it correctly.

Also of importance to the lender is the Loan to Value Ratio and the Debt Service Coverage Ratio, (DSCR). The DSCR is how much of the proposed monthly payment will be covered by the net operating income as calculated on the Pro Forma Operating Statement. Lenders prefer to see 100% coverage and on some properties a 120% coverage is required. On purchases this determines the amount of down payment required and the terms of the proposed loan and for refinancing, the loan-to-value allowed and how much cash-out may be received, if any. 

Commercial lending is not regulated or overseen by HUD so RESPA does not apply. Dont expect to see your typical forms such as a standard residential loan application, Good Faith Estimate or Truth in Lending disclosures. Also be aware that closing costs may be much higher than residential loans because of specialized appraisals, environmental reports, attorneys fees and other costs for special services rendered.

There are also loans for borrowers or properties that may fall outside of the traditional commercial lending guidelines. They typically require 30% down (seller carry backs are allowed up to a 95% combined loan-to-value or a 70% loan-to-value if refinancing. Some lenders even offer commercial Stated Income-Stated Asset programs. These usually have loan limits of $600,000. With a reduced loan-to-value, credit scores as low as 550 may even be allowed. No IRS 4506 form is required to be signed. You can close in the name of a corporation, trust or LLC and cash-out is allowed on refinancing. Fixed rates and ARMs are available.

Commercial real estate may be worth exploring and it just may be one more way to expand your investment and real estate portfolio.

Adrian Skiles, GML