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Looking to buy a commercial property? Here are 6 key considerations for financing the purchase

June 7, 2019 ​​6 min read

 
Commercial lending expert Adam Fraser weighs in on what you need to know


You’ve weighed the pros and cons of leasing vs buying, and you’ve decided to buy a commercial property for your growing business or as an investment. Chances are you’ll need to finance the purchase. With the help of Adam Fraser, Regional Manager of Commercial Services at Coastal Community, we’ve compiled six considerations to help you navigate the process..

1) Typical terms 

Let’s start with the basics: interest rates, terms to maturity and loan amounts. Interest rates on commercial mortgages are generally higher than for residential properties. Lenders consider commercial properties to be riskier because repayment depends on the success of the business. 

Amortization periods (how long it will take to pay off the debt through scheduled payments) of 20 years are typical, but some lenders offer 25-year amortization.

One of the biggest questions for any buyer is “How much of a down payment do I need?” Commercial loans top out at about 75% of the value of the property.

Keep in mind that lenders can provide a variety of tailored financing options, working with business owners as well as their financial and legal advisors to establish a debt structure that best supports the business’ financial model.

2) Have your financial statements ready 

Lenders will want to see three years’ worth of financial statements for a corporation or limited partnership, or three years’ worth of tax returns for a sole proprietorship. This will help them determine whether the business is generating enough income to support the debt..

3) Take your time

Adam cautions that the purchase cycle for commercial property tends to be longer than for residential property. “There tend to be fewer suitable options for the unique needs of the business, and it can take time to find one that works. Be prepared for a longer subject-removal and due-diligence period, as well as a longer closing period than in a standard residential house purchase.”

4) Consider what you need AND what you can afford

Business owners who decide to buy a commercial property are understandably focused on finding one that meets their physical requirements. But they should take the time to figure out how much debt they can afford. An experienced commercial lender can help you understand how much money you can afford to invest without taking on too much debt or putting too much pressure on your cash flow.Adam Fraser says that lenders look to one key measure when assessing whether or not a business can afford a loan: the debt service coverage ratio. “This tells us if the business is generating enough cash to support the loan payments,” he explains. “We want to see at least $1.25 of cash flow generated for every $1 of principal and interest payment.”

Tip: You can calculate your debt service coverage to see if the numbers work

net profit + interest on long-term debt + amortization & depreciation + taxes

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principal + interest payments

5) Factor in cost of improvements

Rarely is a building perfectly suited to the needs of your business, or to the needs of your ideal tenant. Your commercial real estate budget should take into account the costs required to furnish or renovate the space, and these costs should be included in the financing discussions.

6) Local expertise helps

Locally based lenders, with local decision-making abilities, often have an advantage in understanding the unique aspects of each situation. Their familiarity with the local market and the local business climate can factor in to their advice and the terms of the financing. Lenders based elsewhere tend to take more of a ‘cookie-cutter’ approach. 

Some of the considerations listed here might seem substantial and extensive. The truth is, they’re meant to be. Owning a commercial property can be a significant chapter in your life, so you’ll want a property—and a financing solution—that will fit your needs.

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