While the commercial lending market requirements have definitely tightened compared to before the collapse of the housing market, an awareness and knowledge of basic commercial real estate loan requirements can make the process of securing a commercial real estate loan.

First, loan terms in commercial real estate can vary greatly, from one to 10 years. Most private lenders restrict asset-secured financing to shorter terms of no more than two to three years. There is also much variation in LTV ratios, usually between 50 and 80 percent. Hard money lenders typically offer between 60 and 75 percent, while SBA loans can go as high as 90 percent.

Second, when securing a commercial real estate loan, it’s important to remember that there will be upfront fees on the loan, including fees to cover the application and due diligence by the lender. This due diligence fee generally covers the costs of underwriting, ordering appraisals, investigating the borrower, feasibility reports, legal fees and any other costs of processing the loan.

The best way to ensure that your loan application proceeds smoothly is to make sure that your documentation is all in good order. Having complete documentation will make it easier to satisfy lenders. This can include, but is not necessarily limited to: an executive summary and history of the project, financial statements, other real estate owned, summaries of recent appraisals, cash flow, net operating income, and details of costs, both paid and still to come. When preparing documentation, it is helpful to keep the six C’s of commercial lending in mind when securing a commercial real estate loan.

1. Capital: You’ll need to show documentation of the business’s capitalization, reserves, financial statements for the business and yourself, and net worth.
2. Capacity: You should be able to demonstrate an ability to repay the requested financing.
3. Cash Flow: Ideally, you should have a debt-service-coverage ratio of 1.3.
4. Character: Your character, integrity, and professionalism can play a role in securing funds, especially when working with private or hard money lenders.
5. Condition: This goes beyond a simple assessment of the property you want to purchase to take into account your business plan, a valuation of the proposed purchase, and feasibility studies of the marketplace and your potential competition.
6. Collateral: You’ll need to provide sufficient collateral for the loans from any lender. For private and hard money lenders, this will most likely be the asset which you’re securing the funds to purchase.

Institutional lenders will be most interested in the capital, capacity, and condition. They will be less willing to lend money to borrowers who cannot show a proven track record for their business. Hard money lenders are more willing to take the borrower’s character into account, so they can be a good option for borrowers who are purchasing real estate for a startup or other newer company. Borrowers can then refinance through a traditional institution once they’ve established their business’ viability.

In the aftermath of the financial crisis with stricter lending regulations put in place, borrowers who keep these basics in mind will have more success in securing commercial real estate loans, whether they are dealing with traditional institutions or private lenders. The difference between traditional and private sources of financing typically comes in the importance given to the various criteria. Private and hard money lenders will place more weight on the character of the borrower and the property that will secure the loan, whereas institutional lenders focus more narrowly on the property’s ability to produce income.

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.