CRE Financing-A Lender’s Perspective
CRE financing can be a risky business, but it also can carry significant rewards if the loans go towards the right projects. A lender wants your venture to succeed almost as much as you do, because the lender wants to make sure that he or she is repaid. In addition, success breed success, and once real estate investors have caught the bug, they will want to make similar investments. This means applying for more financing, which can be a lender’s dream if the investor is successful and a nightmare if the investment goes belly up.
Think of the lender as a kind of partner rather than an adversary. The lender isn’t going to say “no” out of spite (at least one hopes), but because the bank or the lending firm doesn’t think the investment idea will generate enough cash flow to pay off the principal and the interest of the loan. As an applicant for CRE financing, you need to convince the lender that your idea is not only a good one, but it has worked in the past. It is essential that you show a track record of success in your own investments and for similar investments in the area. Has a shopping mall or office space in a location close by been going gangbusters? Be able to show that your investment is likely to have the same fate.
One reason CRE financing is so risky is that the investor depends on the success of the tenants. If a store goes out of business or a company files for bankruptcy, this could spell trouble for the investor. The lender needs to know that your property will be occupied steadily by tenants, that the vacancy rates will be low and that the businesses you are renting to are financially healthy. In the case of an unforeseen downturn, you should have enough capital to continue paying off the loan. A recession can be a killer for a commercial real estate investment project if one isn’t prepared for it.
As one applying for CRE financing, you want to look for the lowest interest rate and possibly for a long-term loan with low monthly payments. A lender will give you that if you are a seasoned investor with a track record of success or if your project has strong prospects for success. If the bank says “no,” you may be able to secure funding from a private lender that charges higher interest rates and requires personal assets as collateral. Decide whether you can handle this risk before pursuing these options.