Commercial Real Estate Loan Requirements: What’s Needed to Qualify

David Cohn
Oct 12, 2020
Commercial loans

Any purchase, investment, or improvements related to commercial property will require a considerable amount of money to fulfill.

You can get the financing you need with a commercial real estate loan, which is somewhat similar to a home mortgage but is meant for business property.

Your access to that loan will depend on your ability to meet commercial real estate loan requirements and many other factors.

Commercial real estate loans are typically used to renovate or buy commercial property.

Lenders will usually require that the property be owner-occupied, which means that your business should occupy at least 51 percent of the property.

The Small Business Administration (SBA) offers programs that could guarantee these loans.

Before signing up, you should look into the requirements for commercial real estate loans that you want to apply for so you can get ready.

To qualify for a commercial real estate loan, you need to decide on the exact type of financing you need, which will depend on the business and property.

From there, you can start narrowing down your options when it comes to potential lenders.

Commercial Real Estate Loan Requirements

Private Lenders would typically have three sets of commercial real estate loan requirements involving

  1. Your finances,
  2. The finances of the business
  3. The characteristics of the property.

Here is an overview of each:

Personal Finances

Commercial lenders and banks will want to look into your credit score. They will also want to check the credit score of your business partners.

That way, they can determine if you have a history of financial problems, such as tax liens, foreclosures, court judgments, and defaults.

A low score could adversely affect your chances of getting approved for a commercial loan. If this is the case, you may need to look for alternative financing such as hard money loans.

Business Finances

Commercial real estate loans require extensive much more scrutiny than residential mortgages do. If you are a small business owner, you would be considered “risky.”

Commercial private lenders and banks will explore your books to see that your business has sufficient cash flow to repay the loan over time.

A lender would likely calculate the debt service coverage ratio of your business.

That is the annual NOI (net operating income) divided by the annual total debt service, which is the amount you will have to spend to pay back the interest and principal on your debt.

A ratio of at least 1.25 is acceptable, but a higher number is preferred.

For instance, if your business is debt-free and applying for a $100,000 loan, the lender should want to see a minimum NOI of $125,000.

Credit scores are part of the requirements for commercial real estate loans, too.

Expect the lender to look into your business’ credit score based on the terms (i.e., down payment requirement, payback period, and interest rate).

A small business must have a minimum score of 140, but exceptions may apply, depending on the lender.

At times, a lender may accept a lower FICO SBSS credit score. It’s also important to consider the structure of your business.

To qualify for a loan, it must be a limited liability entity, such as an LP, LLC, C, or S corporation.

A sole proprietorship is considered personal instead of commercial, and that could be risky for your wealth in case of a default.

Characteristics of the Property

Lenders will want to get to know the property that you want them to finance.

After all, it will be the collateral for the loan, and they have the right to seize it if you are unable to repay on time.

One of the important commercial real estate loan requirements is for your business to be occupying at least 51 percent of the building.

If not, you may want to consider an investment property loan suitable for rental properties.

A lender who provides hard money loans usually refers to the property value as the basis for the loan, with minimal reference to your creditworthiness.

The property could be a facility (i.e., a laboratory or a warehouse), a commercial building, a storefront, or any other commercial property.

Keep in mind that single-family residences are not included, but a multifamily property could qualify.

In general, the lender will let you borrow up to the maximum LTV (loan-to-value) ratio, which is often around 65 to 75 percent.

This means that your company must set up the remainder as the down payment for the commercial real estate loan.

So, for instance, if the property has been appraised at $200,000, a lender would require an LTV of 70 percent, and you can expect to provide a $60,000 down payment and get a $140,000 loan.

Get to Know the Commercial Real Estate Loan Application process.

Documentation is important when applying for commercial real estate loans; you will want to provide the right documents to your preferred lender.

Most lenders and banks have these requirements for commercial real estate loan:

  • Your financial reports, records, and books for up to the last five years or since your business inception, whichever is the shortest. You will need to include leases and other off-balance-sheet financing.
  • Tax returns of up to five years.
  • Credit reports of all owners and partners and the business.
  • Projected cash flows for the loan’s lifespan.
  • Your state certification as a limited liability entity or corporation.
  • A business plan explaining how you intend to use the property, along with an explanation of your company’s commitment and management expertise.
  • A property appraisal from a third-party.
  • Proof of citizenship (optional, depending on the commercial real estate loan requirements).

Hard money lenders may focus on looking at the property's projected and current value and have fewer requirements regarding financial disclosures.

What Happens if you have Poor Credit?

Borrowers with a new business or poor credit may find it more difficult to access the commercial real estate loan that they need at a reasonable interest rate.

Lenders may reduce the maximum LTV, demand more collateral, or recommend improving the credit score.

However, you could consider these steps to overcome those obstacles:

  • Secure community grants.
  • Apply for an SBA 7(a) or SBA 504 loan (subject to agency requirements)
  • Pay off existing debts and work to improve your credit score.
  • Pledge additional collateral where possible.
  • Work with a deep-pocket investor, partner, or a co-signer.
  • Consider a P2P or hard-money lender.
  • Choose a less expensive property.
  • Agree to pay a larger interest rate or a higher down payment.

Where to Get Your Commercial Real Estate Loan

Capital Investors Direct is your one-stop-shop for commercial real estate loans.

We offer a range of loan programs like hard money, bridge loans, investment property loans, and stated income loans.

Our commercial real estate loan requirements are favorable to most business owners looking for alternative sources to finance their property.

By working with us, you are guaranteed transparent and efficient communication, zero hidden fees, super flexible terms, excellent customer service, and a reliable team who has your best interests in mind.

Capital Investors Direct is a source for commercial real estate finance solutions, including tools and information you need to make informed decisions and maximize your profits while avoiding any possible predicaments related to securing the right financing.

We aim to provide convenient and strategic lending services that are transparent and easier for your business.

Apply now for a commercial real estate loan with us. You can also get in touch with us to learn more about commercial real estate loans' requirements.

We’ll be with you every step of the way.