Finding the Right Commercial Financial Services

In contrast to residential or independent financial services, commercial financial services focus on serving those who are in private companies, government agencies and non-profit organizations. There are many different types of commercial financial services available, and if you’re a new business owner you may feel overwhelmed by all of the options.

The easiest place to start with your decision is finding a place that will handle your business bank account. In order to get your business account with your business name, you’ll first need to register a business license and then get a fictitious business name statement if you are doing business in a name other than your own. Once you are armed with this paperwork, you can start to shop for a bank to use.

Your choice of bank will largely depend on what type of business you are running. If you need to ability to accept credit cards, you’ll need to find a bank that offers merchant services. If you’ll only be accepting cash, this won’t be as important.

In addition to a bank account, some small businesses may require commercial financial lending services. If you need to borrow money in order to fund your business, this applies to you. You can get a loan to grow your business from several different sources. All of these loans will require you to develop a lengthy business plan so you can show the investors exactly what you intend to do with the money and how you intend to ensure the growth of the business.

The first source for commercial financial lending services is through your bank or another banking institution. Bank direct loans offer competitive rates and it can be helpful to have your finances and your loan all in one place.

Another source for commercial loans is through a government guaranteed loan. These loans are available through the Small Business Administration. Although the SBA itself does not fund the loan, they provide counseling and coaching to help you perfect your loan presentation. Once you create the presentation, the SBA will recommend you to a lending institution. Their recommendation can make a huge difference in whether or not you get the loan.

A third lending option is through private investors. These are often called angel investors and they can lend you large amounts of money in order to help start your business. These individuals or small groups are looking to help entrepreneurs make their start. Many of them have already had business success and are looking to “spread the wealth.” You can find private investment groups online or by talking with the Chamber of Commerce or Small Business Administration in your area.

Whether you borrow money or not, you’ll need a small business accountant to help you manage your finances. Unless you’re a financial professional yourself, it’s a good idea to use this type of commercial financial service. An accountant can help show you how to better manage your money and get your business into the black as soon as possible.

Commercial Construction Loans – Abandoned Deals

Commercial construction loans have taken perhaps the hardest “beating” in the current credit crisis. Bottom line, banks do not want too or cannot take on the additional risks that come with construction loans.

Further, we have seen many commercial construction loans get canceled. And we are referring to loans that have closed on the land acquisition component, than the funding bank backing out off the rest of the project. This is something we have never seen before. This puts borrowers in particularly difficult positions, as they have debt payments on unfinished projects and puts a stain on the deal for other potential lenders. As they will all start off with the assumption that the borrower had done something wrong.

It also puts the funding bank in a very bad position as well, as they have a lot of liability to deal with and stand a very good chance of being sued for damages by the borrower. They have not honored their commitment. Also, by not completing the project they further hurt themselves, due to the fact that a good portion of these borrowers may not be able to find financing and will default on their loan.

Commercial Construction Loans

For example, we recently worked on a project that we could not close. The project was an automotive repair type construction project, ground up. The borrower purchased/closed on the acquisition of the land at $600,000 and had financed $450,000. The other $150,000 was supposed to be the total down stroke of the entire project (not just the land) which had an additional $400,000 construction component to it (it was an SBA loan, 85% financing). That was basically all of the cash the borrower had. The bank pulled out and now the borrower has a $4,500 a month interest only payment and very little options on how to entice another bank to come along and complete the deal.

As far a potential solution on the above transaction (and other similar ones), is for the borrower to bring on a partner. Though not ideal for the borrower, it is probably the only way to get the above commercial construction loan closed and to avoid a complete financial disaster. On the above transaction, all of our sources wanted to see cash reserves, post close, of at least 5% of the $1,000,000 project cost and to come into the deal with another 10% injection. He was at 85% financing and needs to be at more like 75%.

This is just one example. Some of our clients that have come to us have had better “endings” to their stories. For example, we just knew of the sources that would fund their loan requests as is, with no further cash injection or need to bring on a partner. Bottom line, borrowers that have an “abandon” commercial construction loan, need to figure out a solution, as soon as possible.

Medical Financing and Commercial Mortgages

Medical financing continues to enjoy the best loan options in the business. Lenders continue to “salivate” over doctors, dentist, and veterinarians. For example, 90% financing on purchases or construction transactions still exists.

A lot of borrowers are surprised to hear this, especially in regards to construction financing, as most banks are currently no longer considering construction loans. However, there still are a hand full of national, non depository banks and lenders that continue to lend.

One of the interesting things about both purchase or construction financing for medical practitioners is the ability to roll in other non real estate components into the loan. For example, say you where considering purchasing an office condo, which only currently had the outer shell complete. The cost to build out of the space can easily be included. In addition, cost of medical equipment can be rolled into and often amortized over a 25 year schedule, unlike most equipment lenders that normally only offer 5 – 7 year schedules. Also lines of credit/working capital can be factored in, beyond the value of the real estate.

Medical Financing

We are currently working with a doctor in Georgia, on a ground up construction project which is a very good example of this. He purchased the land for $300,000 and the cost for construction is $500,000. For most non medical borrowers they would only be able to have the 80% of the $800,000 financed. However with this doctor, he added $150,000 of equipment and a $250,000 line of credit. He received 90% financing of the $950,000 and still had the line of top of that… With this particular lender they will go up to 133% of the real estate/equipment value (only for medical financing transactions).

Medical practitioners should take some time or work with a seasoned third party provider to produce options beyond what the local banks provide. There can be huge differences, again like higher leverage, longer fixed rates (like 10 years) and amortization schedules to 30 years. As a comparison, most local banks only offer 20 year amortization schedules with 5 year fixed rates, and they expect side business, like your checking, saving, etc if you work with them.

Getting Funded With a Hard Money Commercial Mortgage Loan

Conventional financing through traditional lending institutions, such as commercial banks, Wall Street brokers and major insurance companies, is becoming very difficult to find. Banks and other conventional lenders have tightened their lending standards significantly and are caught up in the credit crunch. In many cases they can’t make a loan even when they want to.

There is a very severe lack of liquidity in the major financial markets. One consequence of the banking crisis has been that more and more commercial real estate investors are turning to private, often called “hard money” lenders. Hard money commercial mortgage loans have become a primary source of funding for property owners, investors and developers all over the country.

Borrowers are finding that private lenders are highly professional and very responsive. Private lenders can fund good deals very quickly, sometimes in just days, with less paperwork and documentation requirements. Hard money lenders tend to lend based on the equity in a property; private loans are not credit driven. Many private lenders are “portfolio lenders” who hold the mortgages they write in their own loan portfolios. They are not dependent on the secondary mortgage market and have not been paralyzed by the current problems in the banking system or the bond markets.

Private lenders can be small but some are huge and have more cash-on-hand than many federally chartered banks. Often hedge funds and private equity firms act as hard money lenders, making loans against quality commercial property for the benefit of their investors. In some cases private lenders are wealthy individuals who are looking for higher returns on their funds than banks and government bonds can offer them.

In most cases private commercial mortgages are short term loans that mature in 36 months or less. This makes private money ideal for use as bridge financing while a conventional, longer term loan can be lined up and closed.

Banks are saying no more often than they are saying yes now-a-days. Even good projects and quality buildings are being turned down for financing due to the credit crisis. Rather than let a deal die, commercial real estate investors are taking advantage of private, hard money loan. The rates and points are higher but, unlike banks, Wall Street and the other big players, private lenders have money to loan. Private lenders make their own lending decisions and don’t have to consult with distant loan committees or worry about the bond markets. Hard money lenders are making deals and closing loans even in the midst of this very serious financial crisis.

It is possible that in a year or two our credit problems will be behind us, but in the mean-time private lending may be an investor’s best chance to get a deal financed.

Commercial Loan For Your Hotel Property

Getting a commercial mortgage for a hotel property is very similar to getting a commercial mortgage for an owner occupied commercial property with a few subtle differences. The driving force for the majority of most hotel income is the RevPar or revenue per available room. RevPar is most commonly calculated by multiplying a hotels average daily room rate (ADR) by it occupancy rate and is a key indicator of performance. Rising RevPar is an indication that either occupancy is improving; the ADR is increasing, or a combination of the two.

Although RevPar only evaluates the strength of room revenue, it is typically the most relevant indicator of performance. While many full service hotels generate revenue through other means such as restaurants, casinos, conferences, spas, or other amenities the majority of hotel properties are either limited service flagged properties or limited service unflagged properties. A limited service hotel is simply a hotel with out a restaurant. Because the operating costs of the restaurant component generally run higher than that of the hotel operations, it is common for the net operating income (NOI) as a percentage of total sales to be lower for a full service than a limited service hotel. For this reason the majority of commercial lenders prefer to finance limited service hotels.

Flagged vs. Unflagged Properties:

A flagged hotel property is simply a hotel that belongs to a national franchise. An example of a flagged property would be a Holiday Inn or a Best Western. For the guest, a flagged property provides the benefits of a uniform standard that is upheld by the franchisor. A guest could stay in a flagged property on the east coast and could expect the same flag on the west coast to have the same standard of cleanliness and amenities. The owner of the property gets the benefit of a nationwide reservation system and marketing. For this benefit the operator is expected to pay a franchise fee which can typically range anywhere from 5% to 10% of room revenue. Because of the advantages that a flagged property has, most commercial lenders prefer to finance them over an unflagged property. Sometimes it can be extremely difficult to get a commercial loan for an unflagged property, especially if the property isn’t in what is considered a destination resort area. A destination resort area would be an area like Miami, Myrtle Beach, or Orlando FL. An unflagged property in a destination resort is easier to obtain a commercial loan on than an unflagged property in other areas of the country.

Exterior Corridor vs. Interior Corridor:

An exterior corridor property is a hotel property where you can actually see the door to the rooms from the exterior of the property. These are sometimes referred to as a motel instead of a hotel. The term motel is actually derived from the term motor hotel where most travelers would park their vehicle directly in front of their room. While there are disagreements between what defines a motel and what defines a hotel, there is typically very little difference between the two outside of a lenders perception.

Most exterior corridor properties are older and subsequently will not have the quality of furnishings and will have more deferred maintenance than an interior corridor property. An interior corridor property is going to be more energy efficient and would have a lower utility expense as a percentage of gross revenue.

Financing Your Hotel Property:

When trying to get a commercial loan for your hotel property there are a few distinct differences you can expect as opposed to financing other commercial properties. A hotel property is considered special purpose in nature which simply means that it is generally cost prohibitive to convert it to alternate use. An office building or retail space can accommodate numerous types of businesses whereas a hotel property can only accommodate a hotel. Because of this a commercial mortgage for a hotel is going to be considered riskier to the lender than a commercial mortgage for other general purpose property types. A lender will mediate this risk by taking a more conservative approach to underwriting a hotel property.

The loan to value (LTV) for a hotel property will be lower than other general purpose property types. For a limited service, flagged property 65% LTV is typical and that number can go down depending upon the age of the property and whether its interior or exterior corridor. The LTV is simply a ratio calculated by dividing the loan amount by the value of the property. The debt service coverage ratio (DSCR) for a hotel will also need to be higher than that of a general purpose property type. The DSCR is a ratio that determines the strength of the property or business income in relation to the proposed mortgage payment. A typical required DSCR for a hotel property by a commercial lender is 1.30 which simply means that for every $1.00 in proposed mortgage expense there should be $1.30 available to pay it. For other general purpose property types the DSCR is lower. A DSCR of 1.20 is common for general purpose property types and can go oven lower for a less risky property such as an apartment building.

Because the acquisition of a hotel property under a conventional program requires a large capital injection, many borrowers prefer to purchase a hotel property by utilizing the SBA 504 program. This program enables the borrower to put in as little as 15% and still obtain a better interest rate than a traditional commercial mortgage for a hotel.