IMPORTANT: California Bank & Trust will be making security upgrades to our digital systems on Tuesday, June 23, 2020. To see how you can be prepared for this update, please click here.
Is your business considering buying your own commercial space? You'll probably spend some time researching costs and comparing the pros and cons of owning the building your business occupies. If you're ready to move forward, your next move may be to submit a loan application for purchase of the building. Knowing what factors lenders consider when financing owner-occupied commercial real estate can help improve your chances of success.
Lenders will scrutinize a number of factors related to business performance, financial stability and credit risk. As you prepare your loan application and present your case to a lender, be sure to focus on the following areas:
Occupy a majority of the space
Your business must occupy 51 percent or more of the property to qualify for an owner-occupied commercial loan. In some cases, a limited liability company (LLC) that is different from the operating entity may be used to own the property. However, the operating entity and LLC must be directly correlated (held by a majority of the same owners). If you have questions about business structure or leasing space to tenants, consult with a tax or legal advisor about the implications for your business.
Proof of profitability
To qualify for a commercial real estate loan, a business must be able to show historical profitability of the operating business. A lender may want to see a business plan that shows projected financial statements, including profit and loss, cash flow and a balance sheet. Depending on the application, additional documentation may be required.
Financial strength of owners and guarantors
The assets of individual owners and guarantors may also be considered as an indicator of the financial strength of borrowers. You may need to provide financial documents such as asset statements, tax returns and other relevant personal financial information. How you manage your business assets may also play a role in a lender's decision, including how you pay your debts and collect on debts owed to you.
Credit history
As is the case with any loan, your payment history on existing credit relationships is considered an indicator of future payment performance. Check your personal and business credit rating from major credit rating agencies before applying for a loan. Review the information for accuracy so you can address red flags and dispute errors, if any, on your report.
Comparable sales and lease rates
Your lender will review current sales and lease rates for similar types of properties in the area to evaluate if the purchase is a viable investment that may hold its value. Knowing the area comps can be useful when assessing the fair market value of your property compared to similar properties that have recently sold.
Need help navigating next steps? At California Bank & Trust, our lenders are in sync with the local commercial real estate markets and we can be your guide throughout the process. If you decide to buy, we have owner-occupied financing options including conventional and SBA loan programs available from California Bank & Trust.
Please note that neither this financial institution nor any of its affiliates give tax or legal advice. Consult your tax advisor regarding your individual circumstances.[cite::171::cite] [cite::172::cite]