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10 Things to Know About Purchasing a Commercial Property

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Finance for commercial property is more complicated and more regulated than the residential mortgage industry. Read on for 10 things to know about purchasing a commercial property.

Commercial Real Estate Loans

To help with financing commercial property purchases and any future development or construction, you can take out a commercial real estate loan. These options are available to business entities such as S-corporations or limited liability companies.

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Repayment Terms

Commercial real estate loans differ from residential mortgages in that they come with two types of terms: long-term loans of 5 to 20 years and short-term loans under 3 years. Additional types of loans for commercial property buyers are amortized or balloon loans.

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Interest Rates

Your creditworthiness, the type of business and its financial health determine the interest rate on your commercial real estate loan. These interest rates are usually higher than those for a standard residential mortgage.

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Loan Fees

Lenders bundle upfront fees into the overall cost of a commercial real estate loan, including loan application, loan origination, legal fees, property appraisal and survey fees. Some loans also come with a fee for paying off what you owe early.

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Small Business Administration

The CDC/504 Loan Program of the U.S. Small Business Administration offers commercial real estate financing specifically for purchases of fixed assets. With either a 10- or 20-year term, an SBA loan provides a fixed rate instead of the prime lending rate.

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Adding Value

Commercial real estate developers add value to a property to increase its net income through renovation and upgrades or rehab work. Office and retail space are a good starting point, as stated by Entrepreneur magazine.

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Income Generation

The income produced by a commercial property is directly related to its usable square footage. Because of this increased value, your bank will also want a higher down payment (typically 30 percent or more) than a residential mortgage lender will.

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Cash Flow

Commercial real estate can diversify risk and provide greater cash flow than investing in residential real estate. The yield on a commercial property is typically greater per square foot than with residential.

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Foreclosure

One risk of purchasing vacant commercial property is foreclosure. Banks will use the same methods when a commercial loan defaults as they do when residential mortgages goes into foreclosure.

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Storefront Intel

When you're thinking of buying a commercial property, find out the vacancy rates from previous owners and talk with current storefront managers about doing business at that location. Learn whether they plan to renew their leases and if the site is zoned properly.

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