Texas commercial real estate brokers are well-versed in buying, selling, and leasing commercial properties. This means that they know a thing or two about how to analyze the market and negotiate services to help you achieve your real estate goals. Something that falls into this realm of expert consulting and management is their understanding of financing. They work with several financing options while navigating the complex world of commercial real estate.
Brokers should be able to explain financing options to their clients in clear and concise terms. This way, they will be able to understand the risks and benefits, and ultimately make more informed decisions. It is especially important to consult with a broker if you have never invested in commercial real estate before. Before having that conversation, let’s dive into what your options are when it comes to lending.
Commercial real estate lending refers to credit that is created to finance an income-producing property. This includes shopping centers, office buildings, hotels, restaurants, and even multifamily housing. It is a type of lending that is usually done by banks or financial institutions that specialize in commercial real estate. The loans are backed by the property itself, with borrowers needing to meet certain financial requirements to qualify. Because lending can be complicated, it pays to have a Texas commercial real estate broker by your side. They will guide you to make logical decisions about taking loans for your business.
Lenders and financial institutions examine the loan-to-value (LTV) ratio before approving a mortgage, a line of credit, or a home equity loan. The LTV ratio is an assessment of lending risk. Were a property to have a high ratio, a loan would be considered high-risk. A good LTV ratio is considered to be 80% or below, with the lowest ratio being achieved with a lower sales price and higher down payment. That said, a higher ratio does not mean that you cannot be approved—the interest on your loan may simply rise.
To calculate the LTV ratio, take the loan amount and divide it by the value of the asset being borrowed against. This percentage represents the amount of the property’s value that is being financed by the loan. The formula looks like this:
When a financial institution grants a business a loan for the purpose of purchasing or refinancing a commercial property, it is known as a commercial mortgage. This is one of the most common types of commercial real estate lending. Essentially, until the mortgage is paid off, a lender will have a legal claim on your property and you will continue to build up equity (ownership). To apply for a commercial mortgage, you can apply directly or make use of a Texas commercial real estate broker. Because commercial mortgages have different requirements and terms than residential mortgages, it can certainly help to partner with a professional.
Raising capital with equity investors is another common way for businesses to secure funding. Equity investors are individuals or institutions who invest in a company in exchange for a percentage share of the company. This is an option recommended to those without anything of value to give to loan providers. Because equity investors take big risks with the goal of earning big rewards, they are willing to do business with you in a way that lenders aren’t. But, with that in mind, they want to see real results once operations are underway.
Be aware that, once you have given up equity, it is likely the case that you will never get it back. Private equity agreements stay in place as long as a business is running, meaning revenue will always be divided. So, you should consult with a Texas commercial real estate broker before committing to this financing option. You should also consult with an attorney who specializes in securities law and is familiar with the rules and regulations surrounding raising capital.
Lenders are given an extra layer of security with Small Business Administration (SBA) loans. These are government-backed, which means that, in the case you default, the government covers a portion of your outstanding balance. The aim of SBA loans is to reduce risk and enable easier access to capital. Because they feature low-interest rates and long terms, Texas commercial real estate brokers find that SBA loans are an ideal financing option. That said, to be eligible, you do have to meet a number of requirements. An example of this is meeting SBA’s size standards, which determine whether your business is legitimately a small business.
When a group of investors pools together their capital to purchase a real estate property, it is known as real estate syndication. The key players in this type of investment are the syndicators (general partners) and the passive investors. Syndicators will underwrite the deal, arrange the financing, and build a business plan, while passive investors simply provide capital. When going this route in financing your business, make sure that you can trust these investors. This will be the most challenging decision you can make, so take the vetting process seriously and have a Texas commercial real estate broker help with negotiations.
Brian Smith, a developer of office/warehouses in Austin and also a broker with Commercial Industrial Properties. says that: “One of the most important decisions you can make when structuring a real estate investment is in choosing your partners. As someone who has successfully structured syndications for commercial real estate myself, I will say having great investor partners made a big difference. Inevitably when developing or operating commercial real estate challenges may arise. When they do, you will know very quickly whether or not you have chosen the right partners.”
While real estate syndication is not risk-free, it does come with several benefits. For instance, you will have access to larger, more valuable properties that you would not be able to purchase alone. This means you have a better chance of diversifying your investment portfolio.
The buyer and seller can absolutely cut a deal between themselves. In seller-financed real estate deals, there is no need to go through a traditional bank or mortgage lender. Through this transaction, the buyer typically makes a down payment to the seller. Over time, they will pay off the remainder of the purchase with interest. There is risk in this financing option considering sellers may not have the same legal protections as traditional lenders do. They have to be prepared in the event that the buyer defaults. However, if done carefully, a seller-financed real estate deal could result in a quick sale of a property and a steady stream of income for the seller.
As an adaption of a brokerage firm that started in 1975, Commercial Industrial Properties is made up of longtime Texas commercial real estate brokers. Clients across a variety of business types look to our brokers for expert consulting. If you need an analysis of your current holdings, we will handle that. And if you have never made a real estate investment before, we will look out for your best interest. Send us a message today to learn more about what services we can provide you. The CIP team looks forward to sharing our expertise!