Wednesday, March 2, 2011

Points to Consider for Financing Commercial Real Estate

I listened to a commercial real estate webinar on Loopnet and thought I'd share some of their takeaways and my own with you. Most small and medium business owners do not pursue purchases of commercial real estate unless they are a commercial real estate or related entity or they are considering or have purchased the property that their business resides in. There are a few who may pursue commercial real estate investment as a separate asset class to diversify their investments. This blog focuses on small business financing and not personal, so this blog entry is targeted to those who purchase office, industrial, or other commercial property to house their respective businesses.

If you are currently pursuing financing for a commercial real estate deal, make sure you do the following:
  • Be realistic in specifying and designating expenses. Be conservative in your estimates on income, ie., your projections.
  • Be clear and upfront about your personal financial position. If you are using other commercial real estate as an asset, make sure you are realistic about the current value of that real estate.
  • Underwriting standards are tighter. The focus of any lender or investor will be on debt service coverage and the associated debt service coverage ratios. Make sure the property you are buying will generate the operating and net income to have coverage and ratios well within the minimum for that lender or investor.
Who's funding commercial real estate investment?
There are still a number of banks funding owner-occupied commercial real estate. Therefore, if you are a profitable, cash flow positive company looking to purchase the building you operate from or will move into, and you have been in business for at least three years and have the financial records to prove this, you have a number of banks and other options to choose from. For those pursuing commercial real estate as a separate investment, options still exist. These include insurance companies, banks with foreign parents, and the "too big to fail: banks.

  • Insurance companies. These never really left the commercial real estate market. Why not? Insurance companies continually bring in money through insurance payments made by the insured. Since insurance companies invest large sums of money on an ongoing basis, they allocate portions of their portfolio to various types of investments. Most insurers allocate a portion of their portfolio to commercial or industrial real estate investment. To take advantage of the the revaluation taking place in the market, insurance companies currently appear to favor commercial real estate purchased out of foreclosure or bankruptcy or some other type of restructuring.
  • Banks with a foreign parent . These have been able to balance their loan portfolios globally and shift assets around from the US to elsewhere. Thus, in general, they've largely been able to mitigate their exposure to poor or underperforming US loans.  
  •  "Too big to fail" banks. These banks wrote down a lot of their non-performing or underperforming real estate assets. They are also continuing to work within their loan portfolios to manage assets to prevent an all or nothing scenario. Inquire about the loan portfolio exposure on a regional level for these national banks to ensure that they have tolerance for your particular deal.
If you want to know more about the commercial real estate market in your area, the market and property dynamics, and what's available for sale, check out Loopnet. I'm a big fan and have used them a lot in the past.

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