How To Impress a Banker - Important Considerations for Commercial Real Estate Financing
When a commercial real estate investor and a commercial lender sit across from each other at a desk to discuss a potential investment real estate loan, each has a question in mind. The investor is thinking, "What interest rate am I going to have to pay?" Meanwhile, the banker is thinking, "Is this person going to pay this loan back?" It is a long-held mantra in the lending world that return of the money is more important than return on the money.
In order to ensure that the loan is likely to be paid back, the banker will look at a variety of factors to determine if any risk exists and whether that risk can be properly mitigated to justify the loan. By being aware of what areas of concern are most important to the banker, a real estate investor can greatly increase the likelihood of receiving the requested financing. Some of the most important of these are these:
- Cash Flow – As with any financial matter related to a business, when it comes to commercial loan financing, cash flow is king. When deciding whether to lend to an investor, the most important aspect to review is whether the use of the real estate generates enough cash flow to cover all the investor's financial obligations and still leaves enough both to pay the loan and to keep some for the business/owner. For owner-occupied properties this would be the operating income of the business. For non-owner-occupied properties it would be rental income from tenants. An investor being well educated on his or her repayment ability goes a long way with the banker
- Risk of Loss Given Default – There is no such thing as a risk-free loan, and any banker who is not willing to take some risk isn't going to be in business for long. The smart plan for the banker is to plan for potential risk and mitigate its possible future impact. To do this the banker will look at the worst-case scenario of the loan defaulting and determine what loss the bank would face in that situation. Then the banker will look for ways to cover this loss, such as sufficient collateral or personal guarantees from business owners. Thinking of these items in advance will greatly benefit the investor.
By thinking like a banker and addressing the items that go into consideration when creating business building loans, investors can not only greatly increase their likelihood of financing but can also protect themselves more as investors in a commercial property.
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