Performing the appropriate commercial real estate due diligence before purchasing is an essential part of successful real estate investment. Due diligence can help you avoid any potential costly and unpleasant surprises when you take ownership of your new property. In this series of blogs, we will look at the key items in a buyer’s due diligence checklist: title insurance and surveys; building and environmental inspections; zoning and existing leases; and financing.

Commercial Real Estate Financing

Within the context of due diligence, the importance of lining up financing can go beyond simply securing the funds with which to purchase your property. If you find the right broker and/or lender, they can also be an ally in checking other items off of your due diligence checklist. Most lenders will conduct their own title and survey research as well as requiring an appraisal of the property. Their research into a property’s history can sometimes be used as a rough measure of whether the property is worth what you’re potentially offering for it.

There are a variety of financing options for commercial real estate investors. You need to do your due diligence and find the option that is best for you and your investment. Banks and other institutional lenders are good sources of long-term funding, but their loans often take longer to underwrite and close, with strict requirements that can exclude many borrowers who are perceived to be higher risk. As an alternative to these traditional sources of financing, hard money lenders can often underwrite short-term loans more quickly with fewer requirements for the borrower to meet. The biggest difference between banks and hard money lenders is that hard money lenders are more interested in the merits of a loan and the value of the property which secures the loan while banks place more emphasis on the liquidity of the borrowing entity, the credit history of the guarantor, the global cash flow of the borrower/guarantor and then also require a careful review of income tax returns and other financial documents.

Commercial real estate financing from hard money lenders is more expensive than that secured from traditional lenders, so it’s important to take that into account when making your decision and also to have an exit strategy for paying off your hard money loan as most are made for only a year or two. These shorter terms mean that hard money is often used as bridge financing and then the borrower will refinance with an institutional lender for a longer-term loan, which will be used to pay off the rest of the hard money loan.

You should definitely take some time to research your lender and make sure they are a reputable source of financing. If you are considering applying for a hard money loan, it is a good idea to use the following to fully vet any potential lenders:

• Ask for references from previous clients and brokers.
• Spend a significant amount of time researching the lender on line. Check in Google for not only the lender’s own web site but look for comments from former borrowers who have not had a good experience with the lender.
• Ask your attorney, your CPA, your banker, and some of the commercial real estate brokers you know for any information they may have on the prospective lender.
• Look for a lender who has experience lending in the region where you want to invest. Getting a loan from an out of area lender has a whole host of problems that working with someone from your own area can avoid.

Montegra has 42 years of experience underwriting hard money loans on properties in the Colorado and Denver area. In total, Bob has underwritten, closed, funded, and serviced approximately $500,000,000 of private capital loans during his career. Feel free to contact Montegra for a list of references and more information on our lending practices.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.