Commercial Real Estate Loans – 12 Problems to Avoid

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Seeking a commercial real estate loan seems to be a good and convenient option for making a decent investment in real estate but there are a few things that must be kept under consideration in order to do it right. Keeping that in view, 12 different problems that need to be anticipated by the borrower before getting such a loan are listed below for your convenience.

  1. Stated Income and Tax returns

Majority of the lenders provide their money to borrowers with a tax return history comprising of several years. In case you don’t have one, get your loan from stated income lenders who don’t verify personal assets or incomes.

  1. Special purpose properties

It is getting hard and hard to get a loan for a special purpose property such as assisted living facility, funeral home or a church. Therefore, it is important to find a lender who offers such loans before it is too late.

  1. Balloon features

Several banks use balloon features for shortening commercial loans to 3 to 7 yrs.

  1. Short term loans

It is recommended to avail a short term loan since it is free of balloon features.

  1. Up front charges

See if your lender asks you for any up front charges in order to avoid any inconveniences later.

  1. Business plans

It is recommended to go for a borrower who doesn’t need business plans.

  1. Cross collateralization

Go for a borrower that doesn’t need you to name your personal assets as a collateral for your loan.

  1. Ownership seasoning

It is recommended to find a borrower with no seasoning and sourcing limitations/requirements.

  1. IRS form 4506 requirement

If you don’t have the right history on account of tax returns, it is advisable to go for a stated income lender who doesn’t need you to sign the IRS form 4506.

  1. Debt Service Coverage Ratio

Majority of the lenders need a DSCR lying in between 1-1.2.

  1. Minimum loan size

Majority of the lenders have a minimum loan size requirement that is somewhere in between $0.5-$1 Million.

  1. Loan processing length

3-9 months are usually taken by traditional banks for closing commercial mortgages.