Investing in Commercial Real Estate Part 7: What do commercial lenders look for?

Commercial loans are similar to home loans, with a twist. As with any financing, use all the numbers to make your final decision. Commercial loans have shorter terms, higher interest rates, and higher prepayment penalties. The process for determining whether a loan will be approved is also different.

Commercial real estate lenders consider 3 criteria in lending decisions:

Creditworthiness. As with most other loans, your credit history and credit score play a big part. Current industry standards include:

Credit score of 660 or greater
No bankruptcies in the last 7 years
No current tax issues, liens, or judgments
No foreclosures or short sales in the last 3 years

Collateral. The collateral is the property in question. If the terms of the loan aren’t being met, the lender can exercise an acceleration clause and begin the foreclosure process.

Lease payments are also assigned to the lender to provide additional security. This means that the lender is paid first.
It’s possible to pledge other assets as collateral. These assets can be personal or business assets and can include receivables and contracts.

Cash flow. Remember that the debt-service coverage should be at least 1.25.

Commercial real estate financing is similar to financing for conventional home ownership. You must have good credit and the means to pay back the loan. In commercial situations, the ability of the property to service the loan is also considered. A commercial property is a business, and the quality of that business is part of the loan approval process.

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”

Russell Sage, American Financier and Politician

Thanks for reading! Stay tuned for the rest of this series, and let us know if you want to chat about your commercial real estate journey.