How To Qualify and Apply For a Commercial Real Estate Loan

  • October 27, 2022

Many buyers are surprised to find out that purchasing commercial real estate is quite different from buying a home, both in terms of scale and financing options. Home mortgages are designed to get you in a house which can be paid off over decades. Commercial real estate can be an investment or owner-occupied. Whether you plan to sell a property as market conditions improve or you’re planning to occupy the property, you likely will need funding to purchase commercial real estate.

The financing process is also quite different, with lenders examining the financials of your business along with forecasts for the future commercial real estate market. These are some of the most important commercial real estate loan requirements to consider before applying for a loan with AVANA Capital.

What You Need To Know: Commercial Real Estate Loan Requirements

Commercial real estate financing is a complex process, and preparation is key, both during the application process and while successfully repaying it. At AVANA Capital, we make the process as easy as possible, but there are a few things to think about before submitting your loan application.

What Do You Need in a Loan?

Before applying for a commercial loan, you’ll need a clear plan for what the loan will accomplish. Are you purchasing a property, making renovations, or building from scratch? How much do you expect each stage of the project to cost? How will you repay the loan? Will you sell the property in a year, or are you hoping to run a business out of it? Having a general set of goals for the property is critical to choosing the right type of loan and being approved for it.

Choose Your Loan Type

Whether you’re purchasing existing or building new commercial real estate, there are a few different loan options. Each has a different interest rate and repayment period that should be investigated before deciding on a financing option.

Bridge Loans

To take advantage of the commercial real estate market, you need flexible financing options to make purchases quickly. When time is of the essence, commercial bridge loans are one of the fastest ways to pay for a property. With AVANA Capital, bridge loans are approved quickly so you can make the purchases you need for your business. Bridge loans are approved much faster than conventional loans, giving you the freedom to purchase property in a timely manner. 

They’re not a long-term solution though, with high-interest rates and repayment periods of as little as six months up to three years. During that time, the borrower makes interest-only payments, with the entire principal due at the end of those few years. 

Throughout the repayment period, the borrower can refinance with lenders who might have a lengthier approval process but lower interest rates and a much longer repayment term.

SBA Loans

SBA 504 loans are used to acquire, renovate, and build commercial real estate properties. You will work with a lender like AVANA Capital, to agree upon a loan amount for your commercial real estate project. Then, you can receive an SBA, government-backed second mortgage of up to $5,000,000. 

You will need to make at least the required 10% down payment on the SBA 504 loan for your project. Interest rates are tied to the federal interest rate, and a 25-year SBA 504 loan typically has an interest rate of around 5-6% (based on current rates).

Construction Loans

If you’d prefer to start from the ground up, AVANA Capital also services commercial construction loans. These require a larger down payment, between 10% and 30%, but require interest-only payments during the construction period. After the building is complete, these loans are easily refinanced to have longer repayment periods with lower interest rates. 

Applying for a Commercial Real Estate Loan

To get approved for a commercial real estate loan, you’ll need to find a suitable property or create a viable construction plan, determine the value of the property and how much cash you’ll need, and then submit all of your financial documentation to a suitable lender. Depending on whether you are taking out a bridge loan, conventional loan, or SBA loan, the process can take a month or more, especially with SBA loans that need approval from a government agency. 

Commercial Real Estate Loan Requirements

To make an educated decision about your creditworthiness, lenders require financial documents pertaining to the health of your business. Lenders underwrite the financials of the company who will hold interest in the property. If the property will be owner-occupied, lenders will underwrite the occupying business. In most every case, the personal owners of the business will be underwritten too.  

SBA loans take a little more paperwork as the program (for the second mortgages) is administered by the US government.  Lenders also need to underwrite the property, to include its value.  For construction and/or renovation projects, this valuation process includes getting an appraisal on the as-complete value. 

These are some of the more common documents you’ll be submitted to a lender for a commercial real estate loan.

  • Tax returns
  • Financial reports (profit/loss report and balance sheet)
  • Business debt schedule
  • Information on the property
    • Purchase agreement for acquisition
    • Building plans and quotes for construction 

Ensuring Approval

There are several ways to improve your creditworthiness and up your chances of being approved for a commercial real estate loan. 

While you probably can’t make your business more profitable in the month leading up to your application, you can pay down debts that lenders are wary of. This will also improve your credit score. 

Other options include pledging further collateral or increasing your down payment. This reduces the lender’s risk and improves your chances of being approved. You could also choose a less expensive property to acquire or scale down your construction plans, lowering the loan amount and further reducing the lender’s risk.

Loan Approval With AVANA Capital

At AVANA Capital, we pride ourselves on providing flexible financing so you can grow your business as opportunities arise. 

Our experience in the commercial real estate market allows us to create financial products that are tailored to your business’s needs. To learn how AVANA Capital can help grow your business, contact us today or fill out our online loan application.