According to a recent market research report, the continued supply absorption will double the number of commercial real estate lenders this year. The big banks will re-enter the commercial real estate lending market, while non-bank institutions will continue to expand their loan books. The increase in the number of lenders will boost commercial real estate lending. At the same time, the favorable environment will help CRE entrepreneurs fund acquisition, development, or construction by securing credit in the form of commercial construction loans, commercial bridge loans, and SBA 504 loans.
However, analysts believe lenders will minimize credit risks and increase the return on investment (ROI) by considering additional criteria or requirements. Only by meeting the commercial real estate loan requirements or criteria set by lenders, a borrower can negotiate for better terms.
In this blog post, we are making it easier for entrepreneurs to secure credit by discussing these important commercial real estate loan criteria.
9 Important Eligibility Criteria for Commercial Real Estate Loans
1) External Credit Rating
Lenders assess the CRE borrower’s creditworthiness based on his or her business credit score. Leading CRE lenders usually consider the FICO score when evaluating the borrower’s credit history. FICO score is calculated by three major credit reporting agencies based on the borrower’s credit history, length of credit, credit utilization, and payment history. Hence, the borrower can meet commercial real estate loan requirements by building a good business credit score.
2) Financial Fitness
When assessing the borrower’s eligibility, lenders consider his/her financial health as well as ability to pay back. They use cash flow as a key industry metric for determining the borrower’s fitness. Cash flow is calculated by deducting the amount of money leaving the business from the amount of cash entering into the business over a certain period. Their loan officers forecast revenue and profit by examining the borrower’s tax returns for a certain number of years. Hence, a commercial real estate borrower can meet loan eligibility criteria by maintaining a positive cash flow.
3) Collateral Value
Each commercial real estate loan is secured by a lien on the commercial property. Lenders require the borrower to mortgage the entire property as collateral. However, primary collateral may include land, buildings, furniture, fixtures, equipment, and electrical installations. In specific cases, lenders require the borrower to provide additional collateral or security like equities, stocks, and other valuable assets.
4) Borrower’s Capabilities
When financing a commercial real estate project, lenders mitigate credit risks by ensuring that the commercial real estate business is established and successful. They require the borrower to submit proof that establishes the business’s financial status accurately. In addition, they assess the borrower’s capital based on his/her experience and expertise. While interviewing the borrower, loan officers collect negative and positive information by asking relevant questions.
5) Loan Structure
Experienced commercial real estate lenders offer a variety of credit solutions – construction loans, hospitality loans, and bridge loans. These loan products differ from each other in several aspects – amount, repayment period, and interest rates. These options help entrepreneurs to secure credit according to their short-term or long-term financial needs. However, the borrower must meet the eligibility criteria set by the lender for individual loans.
6) Down Payment
Down payment refers to the initial payment made by the borrowers while securing a commercial real estate loan. As an additional collateral, a down payment helps lenders reduce the amount of risk associated with the commercial real estate loan. However, the down payment required by lenders varies across credit products or solutions. Leading commercial real estate lenders usually calculate a down payment as a percentage of the property value. Hence, borrowers sometimes have to make larger down payments to secure certain commercial real estate loans.
7) Loan-to-Value Ratio
Commercial real estate lenders use loan-to-value ratio (LTV) as a key metric for measuring potential credit risks associated with a loan. They calculate the ratio by dividing the loan amount by the appraised value of the commercial real estate property. LTV impacts the interest rate as well as the down payment. Hence, it becomes easier for borrowers to secure loans and negotiate better terms when the LTV is lower.
8) Debt-to-Service Coverage Ratio
Often borrowers seeking new commercial real estate loans have prior debt obligations. Lenders measure the borrower’s existing debt obligations based on the debt service coverage ratio (DSCR). They calculate DSCR by dividing the annual operating cash flow of the project by the potential annual debt payments. Hence, DSCR depicts the financial health of the commercial real estate borrower. He or she can secure new loans by maintaining a higher DSCR.
9) Exit Strategy
Most borrowers pay off commercial real estate loans from the cash flow generated from operations. However, certain borrowers repay the loan by refinancing the loan or selling the commercial property. Hence, CRE lenders expect borrowers to define his exit strategy clearly. The borrower must convey how he plans to repay the loan on schedule by preparing a clear exit plan.
Why is AVANA Capital the Preferred Option for Commercial Real Estate Loans?
As an experienced commercial real estate lender, AVANA Capital has been meeting the short-term and long-term credit needs of entrepreneurs by providing a slew of credit solutions – construction loans, hospitality loans, commercial bridge loans, and SBA 504 loans. We have set different requirements or eligibility criteria for each commercial real estate loan.
However, we believe that each entrepreneur must secure tailored loan products according to his/her precise financial needs. Our loan officers help entrepreneurs understand the commercial real estate loan requirements clearly and precisely. At the same time, they assist the borrower in meeting the preset eligibility criteria for the desired loan.
Conclusion
The surge in lending options will help entrepreneurs get commercial real estate loans on favorable terms. They can negotiate for better terms only by meeting the commercial real estate loan requirements set by lenders. However, the requirements or criteria will vary across commercial real estate lenders.
Likewise, the eligibility criteria set by individual borrowers will vary according to the loan purpose, term, and type. For instance, the requirements for hospitality loans will differ from the eligibility criteria for construction or bridge loans. Hence, entrepreneurs must understand the precise commercial real estate loan requirements according to their credit requirements.
