Looking for a Commercial Mortgage? Know These Facts
March 1st, 2006


By Jim Lynch

March-April 2006

Home ownership has always appealed to the individualistic spirit of Americans. That same desire for freedom from capricious landlords and ever-escalating rental rates is also prompting a growing number of people to seek commercial mortgages so they can own the real estate that houses their business. Here are some facts you should be aware of if you are seeking a commercial mortgage for a privately held business enterprise.

Some buildings are better mortgage risks than others. The best are existing buildings with office and warehouse or office and manufacturing space, as well as new construction if it’s amenable to a number of commercial uses. Special-purpose buildings such as churches or tennis clubs are not considered good risks.

You will need to come up with at least 20 percent of the purchase price as a down payment. If you can come up with 25 percent, you may be able to get a better loan rate.

Commercial mortgage loans are generally structured with a rate that is fixed for a certain period of years; the loan itself is amortized for anywhere from 20 to 25 years. An often-used formula is one tied to the five-year U.S. Treasury rate plus a certain number of basis points. At end of the fixed-rate period, the rate would be adjusted according to the prevailing five-year U. S. Treasury rate plus a certain number of basis points. The fixed rate period is generally five to seven years.

The application process can take up to 30 days. It can take two to three weeks to obtain a copy of the final appraisal of the property. Once a bank receives it, along with the company’s most recent financial statement, a prospective borrower should have an answer in about a week.

Lenders review commercial mortgages just as they do any other credit extension to a privately held business. They look at the value of the buildings and the cash flow of the business. And they always look at how management has reacted in the face of what they see in their marketplace: how they have met the challenges that any owner/operator has to meet in business. All are a direct reflection of how well the company is being managed, and the financial statement is management’s report card.

The age of the business and the strength of the management team might be a consideration. The younger the business, the less history it has and the tougher it will be to finance—unless the future looks bright and all the fundamentals are good. In order to get a glimpse of the future of the company, the bank also evaluates the management team that is in place to support the owner/operator. The bank looks closely at the company’s infrastructure and makes sure all the financial paperwork is in order, so that any member of the management team could help answer future questions, if necessary. Management is always critical.

Certain things raise warning flags. If a prospective borrower didn’t have enough cash to put down on the building, that would be a cause for concern. Also, if it appears that the historical cash flow of the business wouldn’t be sufficient to handle the debt service payments going forward, that’s another issue. An uneven financial history makes financing like this more difficult, but that doesn’t mean it can’t be done, only that the lending institution will have to satisfy itself as to the company’s future cash flow.

Lenders look for a cash flow that is at least one-and-a-quarter times the amount of debt service. The stronger the cash flow, the better the financial condition of the company, the lower the risk of the transaction and the lower the rate.

If the value of the property declines, it may have an effect on the loan, depending on whether the customer can continue to make the prescribed payments. But if the value drops precipitously and the bank feels its collateral position has been negatively impacted, it may seek additional collateral.

To the extent that the lender knows you, the process is generally easier. But that doesn’t mean you can’t get deals like this done with another financial institution. Owner/operators tend to look at a building as a long-term solid asset, so lenders feel that these are stable loans to have in place.

Jim Lynch is President and CEO of Leaders Bank in Oak Brook, Illinois.

Responsible Solutions to Mold Coalition Launched

The Responsible Solutions to Mold Coalition (RSMC) was launched at the recent International Builders’ Show in Orlando, Fla. RSMC is an industry association formed through a grant by USG Corporation to ensure that more accurate information is communicated about mold avoidance and control.

The issue of mold continues to be an important topic to builders, homeowners, and government agencies. Its importance has been further emphasized by post-hurricane conditions and rebuilding plans in the Gulf Coast.

“Everyone connected with the building industry has a stake in making sure effective solutions are embraced in solving this important problem,” said Robert Daniels, Director Emeritus of the Tile Council of North America. “First and foremost, consumers and business owners will be more satisfied with their homes and buildings, builders can avoid expensive callbacks, warranty claims and even litigation, and the financial community can be assured of the long-term security of the investment it underwrites.”

Due to the building boom over the past several years, thousands of new builders and subcontractors have entered the marketplace. They want to become informed on important subjects such as mold control, but the amount of information on mold is overwhelming. It was clear that some scientifically-based organization needed to review the best thinking on the subject and present this information in an understandable format to everyone involved in the building trades as well as to homeowners.

The RSMC will maintain a website that will serve as a clearinghouse for information, publish a brochure with accurate information on the systems approach to mold control, host industry forums and participate in demonstration projects, and publish articles and participate in industry events.

The coalition will not endorse products. It will, however, work to meet the needs of both the trade and consumer audience.

The RSMC was formed through a grant from the USG Corporation. In addition to USG and the Tile Council of North America, current members include the Association of Wall and Ceiling Industries International; the Building Research Council, School of Architecture, University of Illinois; International Institute for Lath and Plaster; Lath and Plaster Institute of Northern California; National Institute of Building Sciences; North American Insulation Manufacturers; the U.S. Forest Products Laboratory, Department of Agriculture; and the Western Wall and Ceiling Contractors Association.

What Consumers Say About Mold

In a recent Ducker Research poll of homeowners involved in a remodeling project,

• 86 percent said that mold control is very important to them.

• 44 percent said that they have had mold in their home at some point.

• 86 percent also believe that moisture is the most significant cause of mold.

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