Commercial Real Estate Financing - Outlook and Overview
Oct 29, 2016
Commercial Real Estate Outlook
According to recent data, the commercial real estate market is continuing to improve while at the same time conventional banks are growing increasingly conservative in their lending practices. So how does today's real estate developer find the financing they need to take advantage of the strength in the commercial marketplace? Commercial Hard money lenders are filling in the gap and providing commercial borrowers with the access they need to capital.
The CBRE index which tracks U.S. commercial loan closings showed a quarterly increase of 2.1% this last quarter. It also shows a year-over-year increase of 5.7% in commercial loan closings. This increase in commercial lending signals a strong market for commercial real estate.
At the same time, the Federal Reserve issued a reminder to banks of the commercial real estate lending expectations currently in place. This means that conventional lenders are more closely scrutinizing potential borrowers within the commercial lending marketplace.
With conventional commercial mortgage financing, there are four phases to the commercial loan process. Typical requirements include two years of personal tax returns, two years of business entity tax returns and detailed information about the commercial property. Each loan proposal is subject to individual underwriting and review. These requirements can be prohibitive for a borrower that may have a limited or inconsistent credit history. This process can take up to 60 days and may not be suitable to a situation which requires quick action.
Current Need for Alternative Financing Solutions
Because a hard money commercial loan is asset-backed, the lender mainly evaluates the earning potential of the property that the borrower is financing. This simplifies the approval process and enables these loans to be approved as quickly as 10 days. In addition, a borrower with a problematic personal credit history can secure funding based on a property's potential earning power. Hard money loans are an attractive alternative in today's marketplace given the optimistic outlook for commercial property development and the pressures on banks to tighten credit standards.
Commercial Real Estate Overview
When is it a commercial property?
Generally, commercial real estate is classified by how it serves its' occupants. If it provides workspace for its occupants then it would be considered commercial real estate, as opposed to living space, which would be considered residential. Buildings such as restaurants, stores, offices, and malls are all examples of commercial property.
Features of Commercial Real Estate
The size of commercial real estate space is described in square feet versus the number of rooms typically used in residential. This is because commercial rental rates are generally assessed per square foot since the productive capacity of the space is of primary importance. Commercial real estate leases generally have longer terms than residential leases. Because business tenants would have to disrupt production to move their facilities, they prefer longer lease commitments. In addition, each new tenant often requires specific accommodations to suit their business. Depending on the number of workers and the type of production needs, a commercial space could require a very different lay-out. Commercial spaces are regulated by a wide variety of entities ranging from states and counties to industries and zoning committees. Adhering to all of this regulation requires specialized knowledge. Regulations can affect property valuations since taxes, maintenance, and specialty equipment purchase impact the bottom line.
Who owns commercial real estate?
- Business Owners - Owning your own workspace is a smart, long-term investment. It can benefit a business by stabilizing monthly costs, enabling property depreciation, and increasing the asset-base of the business entity.
- Commercial Property Developers - People who have developed the specialty knowledge required to accurately evaluate commercial real estate are well suited to handle all of the specific maintenance needs of the different building types.
- Investors - Typically real estate offers generous, steady returns that are not highly correlated to the stock market. Commercial real estate funders such as banks and hard money commercial lenders seek profitable opportunities on a large scale. Smaller investors can access commercial real estate REITs through their retirement accounts.
Assessing Commercial Real Estate
Commercial real estate is evaluated on characteristics such as location, facilities, necessary improvements, and recent comparable property sales. The demographics of the area, potential foot traffic, and local economic strength are also taken into account. You can check on local employment rates through accessing the Bureau of Labor website. You can also see how many new properties are currently in development by checking the U.S. Census Bureau's building permit survey. This can give you a sense of what the local commercial lease supply will be in the future.
The favorable economic climate for commercial real estate is driving a great deal of interest in this asset class. With traditional avenues for commercial lending constricting access, it may be necessary to explore alternative options. Riverdale Funding, LLC. offers non-traditional solutions for individuals wanting to make a property purchase, refinance a mortgage, or expand their business.
Contact Riverdale Funding today to access to our hard money commercial loans.