Commercial Real Estate For Business Owners

With interest rates now at historically low levels and the United States economy growing at a strong pace, many business owners have been considering the purchase of commercial real estate for their business locations. The benefits and drawbacks to commercial real estate ownership vary from business owner to business owner but potential buyers should educate themselves about the obvious and sometimes hidden benefits to the ownership of a commercial property. Below are some of the major benefits to ownership as opposed to leasing a commercial space.

Tax Deductions

For many business owners one of the primary benefits of commercial real estate ownership are the tax deductions that can be taken on the interest portion of the monthly commercial loan payment. These deductions can be substantial and each business owner should consult a qualified tax specialist about their unique situation.

Equity Appreciation

On average, commercial real estate properties will appreciate about two to three percent above inflation over the long term. This equity appreciation can result in significant financial gains over a period of decades.

A Retirement Fund

Many small business owners will not receive a pension when they decide to retire. The equity appreciation on commercial property can be significant. An owner can decide either to sell their property at retirement, cashing in on equity appreciation or lease it to another business for a continuous retirement income stream. In fact, in many situations, a business owner may be able to lease out an unused portion of his property, such as a spare office, before retirement for additional income.

Added Value To Business

As opposed to residential loans, many commercial loans are assumable. This makes the business and real estate much easier for a buyer to acquire and enhances the value of the business tremendously.

No Taxes To Pay On Your Rent

When a business leases their real estate they must pay sales tax on the rent paid to the landlord. When you own the real estate there is no tax to pay on the rent. The savings can be significant.

Easy Access To Financing

Great fixed rate loans for terms up to 30 years are now available for owner occupied commercial properties. In fact, in some instances, with strong financials, a business owner may qualify for loan financing up to 100% of the purchase price for his commercial real estate. Business owners should consult an experienced commercial mortgage adviser before making an offer on a commercial property.

In addition to the easily tangible benefits outlined above the business owner who purchases a property to house his business location will be able to have the satisfaction that only comes with ownership and he won’t be making his landlord rich.

Best Way to Use A Commercial Mortgage Broker

The role of the commercial mortgage broker in the UK has dramatically changed recently, largely because the market is thriving. There are more commercial properties being sold and re- mortgaged every month than at any other time in recent history. This growth in the commercial mortgage sector is being fueled by low interest rates and attractive rental yields across a very broad spectrum of property types.

One of the first things a commercial mortgage broker will want to establish is whether the property in question is for owner occupation or for investment. This is because the methods of underwriting the two different types of property are very different.

When acquiring a commercial property for owner occupation the applicant will need to produce all the usual supporting documentation such as accounts, business plan and guarantees. There are options to self-certify the affordability for a commercial mortgage but the disproportionately higher interest rates can mean that this should be the last option. It is because of these differences in pricing between a full-status and a self cert commercial mortgage that using a commercial mortgage broker has become so important.

If the property is being mortgaged for investment purposes then one of the most important factors when assessing the application will be the strength of the rental market locally. This is a major consideration because it is the rental income which will dictate the size of the commercial mortgage in relation to the purchase price, this is known as the Loan to Value (LTV).

Unlike the residential market where calculating the rental incomes for a property is very straightforward, calculating the potential rental income for a commercial or semi-commercial property is much more complicated. This is because of the variety of different types of commercial property, for example a the potential income for a retail unit on a high street will normally be much easier to work out than a one-of-a-kind warehouse on an industrial estate. Semi-commercial mortgages are also complicated by the duel use aspect, typically the main complication would be something like a flat above a fast food outlet.

Once the broker has identified the type of borrower they are dealing with they will then approach a suitable lender. When a commercial lender is asked to consider an application for a buy to let commercial mortgage they will obviously consider the credit history of the applicant, but also the rental income for the property and additionally the demand for the subject property. It should be remembered that commercial leases are very different to residential ones. Residential buy to let leases are known as Assured Short-hold tenancies (AST’s). These are well documented and supported in law. Commercial leases require much more thought.

The most obvious difference is that a commercial buy to let property will normally be let out for between 3 and 6 years with the tenant usually being responsible for the upkeep of the building. Having significantly longer leases is one of the attractions of commercial buy to let property, however the downside is that when empty it can take several months to find a new tenant.

In a perfect world the commercial mortgage broker would be able to place every commercial investment application with a bank or building society. This is because they offer the most competitive rates and favorable arrangement fees of all the commercial lenders. The down side is that banks and building societies tend to be more cautious and will consider all applications very carefully. The LTV’s offered by banks for commercial buy to let mortgages tend to around 75% with rates as low as.9% over bank base.

The other option is to use a specialist commercial property lender, although more flexible these lenders are much more expensive. LTV’s can be as high as 85% but the rates can easily creep into double figures, these lenders also charge high arrangement fees and early redemption charges. The specialist commercial lenders will normally only deal with a commercial mortgage broker and not the borrower.

What to Do With a Distressed Commercial Property

A commercial loan restructure can reduce the amount of interest paid by a borrower or even lower the remaining principal amount still owed on a loan. A loan restructure is available to both businesses and individuals that own commercial properties such as office buildings, shopping centers, strip-malls, hotels, apartment buildings, industrial complexes, and even some properties still in the construction phase.

Obtaining a loan restructure can be difficult, especially if the loan is what’s known as a commercial mortgage-backed securities loan or CMBS loan.

CMBS are bonds that are sold on Wall Street to investors all around the world. The bonds are used to fund investments on portfolios of commercial loans. The income stream from the property is passed from the property owner to the bond holders.

Many of the problems we are seeing today with CMBS loans are due to the fact that years ago underwriting standards became relaxed as intense lending competition resulted from a race for a diminishing population of qualified borrowers. Ratings agencies gave CMBS bonds A-A-A ratings. But the subsequent losses in the CMBS market led to the seizure of that (CMBS) market at the end of 2007.

Once a commercial property goes into default, that CMBS loan is then usually managed by a type of specialist known as a special servicer who represents those bond holders. CMBS loans are often more difficult to modify, as the original issuer of the loan is no longer involved and the beneficiaries are individual and institutional investors that sometimes are located over many states and countries around the world.

Going It Alone

It is difficult for a struggling commercial-property owner to obtain a loan restructure on his own, as most commercial-mortgage borrowers don’t know the proper procedure to present and ask for a restructure. A commercial property modification for a distressed property involves difficult negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting. Most of this work is alien to the commercial property owners.

Commercial property loans are often times structured as portfolio loans since they are generally not securitized like single family residential loans. This structure makes the actual note holder more readily identifiable and approachable permitting an experienced commercial property loss mitigation professional to be much more effective in negotiating a solution that is beneficial to both parties.

For a commercial loan restructure to be negotiated successfully, the bank or special servicer agrees with the borrower to permanently (or sometimes temporarily) alter the terms of an original note allowing the monthly payment to be reduced. This agreement can be reached through a series of several strategies including (but not limited to) a straight interest rate reduction, modifying the loan from principle and interest to interest only, a principle reduction, a longer amortization schedule or some combination of these strategies.

Call In the Calvary

There are two crucial factors to make sure that the negotiations for a commercial loan restructure will yield positive results. The first of these is getting the advice of professionals and experts who are very familiar dealing with troubled assets; and the second important factor is being proactive. By being proactive is meant that the commercial property owner has to have the foresight regarding foreseeable problems in the future-the longer he waits to address a looming bad situation or the longer he waits to get help, the more difficult the situation becomes to handle.

The most important thing an owner of a distress commercial property can do is to be proactive by seeking the help of professionals and experts in the commercial property restructuring industry.

Commercial property loan restructure professionals are familiar with the complexities of a commercial loan modification and knowledgeable in the kinds of information and documents that special servicers and banks require when a property owner applies for a loan restructuring.

The services offered by a commercial restructure consultant would include a go-forward plan to salvage the owners’ investment in the property. Every case is different, and the services offered would depend on the needs of the client.

Possible outcomes for commercial restructure include:

· Term extension: This is when the bank agrees to extend the maturity on a loan that cannot be refinanced because of high loan-to-value (LTV), but has cash flow sufficient to service the debt.

· Permanent modification: Often, a complex transaction that the bank is reluctant to do as it often reduces the value of the asset on the banks books.

· Principal reduction: These are usually only done in relation to a short sale or short refinance where the bank accepts less than the full value to settle the debt. The bank won’t reduce the principal so the property owner can make a profit.

· New equity partner: The bank is more likely to work with a borrower that is willing to release equity in the property to a new investor that comes in with cash.

· Bankruptcy: Unlike residential property, when an individual is in bankruptcy, the judge can “cram down” or reduce the principal or otherwise modify the terms of the mortgage.

A professional who knows the ropes will minimize the stress for the property owner, but more importantly, certainly improve the chances of success, and speed up the negotiation process. Commercial loss mitigation experts with a solid track record in executing successful loan workouts are worth their fees, as they more often accomplish their primary objective, which is to avoid the repossession of the commercial property.