When you’re looking to finance commercial real estate, discussions with banks can be daunting. However, being well-prepared can help you navigate the process successfully. Here’s what you need to know and keep in mind when talking to a bank about financing commercial real estate.
1. Understand Your Financing Options
Types of Financing:
- Conventional Loans: These are traditional loans offered by banks, typically with fixed or variable interest rates.
- Construction Loans: Typically structured with an Interest Only draw period to fund construction costs of the project as they are incurred.
- Bridge Loans: Short-term financing that can help you secure immediate funds while you seek longer-term financing.
- Tax Credit Bridge Financing: Typically used to monetize Tax Increment Financing (TIF) awards, Workforce Housing Tax Credits (WFHTC), or Brownfield/Greyfield Tax Credits.
- Equity Financing: This involves raising capital through investors who will take an ownership share in the property.
2. Know Your Financials
Prepare Necessary Documents:
- Business Financials: Profit and loss statements, balance sheets, and tax returns for the last several years (typically 3 – 4 years).
- Personal Financial Statement: Show your current assets, liabilities, and net worth.
- Global Cash Flow: If you have a portfolio of multiple properties, a Global Cash Flow statement is very helpful for your banker to expedite underwriting.
- Credit Report: Be aware of your credit score; a score above 700 is generally favorable.
Cash Flow Projections:
- Create a detailed cash flow forecast for the property. This can include rent rolls, anticipated vacancy rates, and estimated expenses. Be prepared to provide support for your numbers (assumptions used, risks, etc.).
Market Research:
- Research comparable properties in the area to back up your financial assumptions and demonstrate your understanding of the local market conditions.
3. Understand the Property’s Value
Appraisal:
- The bank will require an appraisal to be completed on the subject property to determine the property’s market value. This must be ordered by a financial institution to be valid.
Environmental Due Diligence:
- The bank will require some level of environmental due diligence depending on the loan size and property type. This could be as simple as an environmental screen or involve a Phase 1 and Phase 2 report completed by a third party.
4. Prepare a Solid Business Plan
Detailed Plan:
- Outline how you plan to manage the property, including marketing strategies, tenant acquisition strategies, and maintenance plans.
Exit Strategy:
- Define your long-term goals and how you plan to exit the investment, whether through resale, refinancing, or holding long-term for cash flow.
5. Be Ready to Explain Your Experience
Management Experience:
- Highlight your experience in managing commercial properties or relevant industries. If you don’t have this experience, consider partnering with someone who does.
6. Understand the Terms of the Loan
Loan appetite can vary widely from bank to bank. It is important to talk with your banker about your goals for the project/property. Loan structure is critical to set yourself up for success.
Loan Terms:
- Ask about interest rates (most banks will fix the interest rate for up to five years), amortization periods (typically between 15 – 25 years depending on property type), prepayment penalties, and fees associated with the loan.
LTV Ratio:
- Understand the Loan-to-Value (LTV) ratio, which indicates how much the bank is willing to finance compared to the property’s appraised value.
7. Seek Professional Advice
Consult Experts:
- Enlisting the advice of your real estate broker, accountant, attorney, and/or financial advisors can help you understand the complexities of financing. I encourage you to connect your advisors with your banker to help structure your deal.
Legal Considerations:
- Consult a real estate attorney to ensure that all contracts and agreements are legally sound.
Conclusion
Financing commercial real estate transactions require careful preparation and understanding of the financial landscape. By equipping yourself with knowledge about your options, organizing your financials, and communicating effectively, you can improve your chances of securing funding. Remember, this is a partnership, and being well-prepared shows the bank that you are serious about your investment and capable of managing it effectively.
Cedar Rapids Bank & Trust is proud to be the CBJ’s 2025 Best Commercial Real Estate Lender. We’d love to talk with you about your commercial real estate project! Please contact us if you have any questions or have a project you’d like to discuss. www.crbt.com | 319.862.2728
Josh Moore is Senior Vice President, Commercial Real Estate Manager at Cedar Rapids Bank & Trust. His direct line is (319) 743-7058.
