I’m considering entering the world of commercial real estate. I have a business which has outgrown its current location and instead of renting, I’d like to develop equity in my new location. I’m fairly familiar with the residential side of things but I’m finding out that commercial lending is a whole new ball of wax. A bit of local research shows that about the best interest rate is prime + 1… so somewhere in the low 8% range. Is this a national standard? Is there much room for negotiation under this system or is it more “clear cut” since the whole commercial philosophy/stragegy is different?
Just wondering if anybody has any useful words of wisdom to help the commercial newbie.
I’m getting commercial notes for 15-25 yr amortization and anywhere from 7.75-8.5% interest rate currently in St.Louis.
Typically you get a little better rate if you’re a good borrower, client, have major assets, etc… Has little or nothing to do with credit score. Your personal financial statement and business financial statement get you the loan. If you’re business cash flows good and you seem like a low forcelosure risk (have cash for emergencies) you get the loan. Then they have very little products like a Fannie Mae lender. It’s typically a “yes and here’s your rate and term”.
They also rarely want to lend you more than 80% of the value of the building. This is a steadfast banker rule I’ve never see violated. There is not much negotiating in bank loans. They all know what they can charge and who charges what. The higher the rate usually less scrutiny. Their rate is tied to prime typically, which is why it’s higher than conventional residential mortgage rates. Some banks do use the LIBOR though.
A good way to make you look better is to open some type of demand account also (business checking, CD, money market). They love the spin off products and fees those generate for the bank. Plus it gives your LO some ammo to back you in loan committee. Try whoever had your business accounts first.
Our commercial RE loans are generally tied to prime, however we do have a few that are tied to the 5yr treasury. I agree with the previous post regarding the 80% rule…our banks are sticklers on this as well. All the more reason to find a good appraiser.
Other thoughts - depending on the type of property, community banks may be more competetive and easier to deal with. They have local control and are eager to establish relationship that will lead to deposits and other services. Shop around. I have seen banks match a competitors terms.
Check and see if there is an economic development agency in your community. Sometimes they make below market loans to stimulate business and jobs.