How do commercial mortgages work?
As opposed to residential real estate, commercial real estate is defined as property that produces income that is used solely for business purposes. Most common examples of commercial real estate include retail malls, shopping centers, office complexes and buildings, and hotels. Acquiring, developing, and building these properties is financed through commercial real estate mortgages, or loans, i.e., mortgages secured by liens on the commercial property.
Banks and independent lenders are actively involved in making loans on commercial real estate, similar to how home mortgages operate. In addition, pension funds, insurance companies, private investors and other sources—such as the US Small Business Administration’s 504 Loan program—provide funds for commercial real estate.
How do you qualify for a commercial mortgage?
To qualify for a commercial mortgage, lenders will usually need your business to occupy 51% of the property. The loan amount and the rate you will receive depend largely on your credit and the value of the property you are putting up as collateral. The reason for this is that most commercial mortgages are asset-based loans. Here are some different ways you can qualify for a commercial mortgage:
Pick the right location. The property’s value impacts the mortgage decision, meaning that securing funding for prime retail space in San Francisco will likely be easier than financing a rural storage unit outside of Keystone, South Dakota. When you are deciding where to buy or build, you will want to take location into consideration.
Communicate renovation plans to lenders. Your lender will always want to know if you plan to make upgrades to a property. Your lender will also need to review the after-repair value, or ARV, for any full-scale property renovations you make. Make sure to have a plan for how you will use the mortgage prior to applying. That way, if the lender has any questions, you’ll have the answers.