When purchasing commercial real estate, the conventional approach applied to financing residential properties, requiring a 20%-25% down payment, is often not a viable option. The increasingly prohibitive costs of these properties requires creative financing options. Whether you are a business owner in search of a suitable space for your growing enterprise, or an investor looking for a high return on investment, but hesitant to enter the foray of commercial real estate because of the complexities of financing, you should be aware that there are many ways to accomplish commercial property finance with a minimal down payment.
3 ways to finance a commercial property purchase
Buying commercial property can be a complicated matter, here are three ways to finance it.
Here are a few solid alternatives for financing your next commercial property purchase:
SBA Loans: The term is a slight misnomer because loans obtained through the Federal government’s Small Business Administration are actually funded by your bank, not the SBA. The SBA’s role in these loans is to provide a government guarantee for loans that are provided by pre-approved qualified banks.
There are actually a few different types of SBA loans to choose from. One of the most popular is the 7A loan, which typically requires only a 10% down payment, has a 25 year term and a maximum interest rate of only 2.75%. 80%-90% of the loan is guaranteed by the SBA. One downside of the 7A loan is the fact that the loan approval process can often be drawn out due to rigorous and lengthy reviews by the SBA. While the small down payment provides you with the flexibility to make improvements and increase the property value of your purchase, these loans also have strict business requirements and profitability standards.
Permanent Financing: For larger purchases, some insurance companies and pension funds, typically though mortgage brokers, will finance your property at a low interest rate and with minimal money out of your pocket. Another major advantage to these loans is that they rely on the long-term profitability of your property so the loan term can be as much as 30 years. Of course, there is a negative side to this well. If you prepay your loan, expect to face a heavy pre-payment penalty. More recently, commercial banks, private equity funds, and real estate investment trusts have entered the commercial financing market in an effort to earn above average returns.
Sandwich Lease: This loan derives its name from the fact that the purchaser pays the seller for rights to hold onto the property and profit from it, termed an equitable lease, while the seller retains legal title to the property. The buyer is responsible for day to day management of the property.
Banks are typically not involved at all in this transaction. This arrangement allows for the buyer to make improvements to the property and benefit from the increase in property value. The buyer has the right to sell the property at any time and keep the excess of the price for which he purchased it from the seller.
Buyers must be especially careful to adhere to the terms of the lease because if they don’t, the seller has the legal right to foreclose on the property. Expert legal counsel is recommended when pursuing this financing avenue.