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Obtaining an Office Building Commercial Loans
Office buildings are a huge part of the community fabric. They create jobs, promote more business to come into the area and generate revenue for the entire community through their businesses. Office buildings, specifically ones with multiple tenants or very strong credit rated tenants, can be eligible for extremely favorable terms.
Property ownership of an office building can transfer many times over several decades, with new investors coming in and reworking the building, its tenants and its general look. Of course, the investment process for office buildings varies from that of other property types. Office buildings are often driven through the location, management skill and quality of their tenants.
Financing for an office building depends on a number of different considerations that go beyond the ability of the borrower to pay back the loan. Some things that have to be considered are the loan to value and debt coverage ratio. Typically, excluding SBA financing, an office building will need a loan to cover 80-90 percent of the purchase price, with the investor putting a 10-20 percent down payment on the building. Also, the debt coverage ratio should not be less than 1.2, which would require the borrower to generate a net cash flow that is 120 percent of the debt service amount.
Other factors need to be looked at with an office building commercial loan, including how many tenants have come into the building and left in the past ten or so years, and how many tenants are currently in a lease agreement, at that moment. If most of the tenants are in their fourth year of a ten year lease, then it is possible, after looking at rollover and renewal scenarios, that the debt coverage ratio will not be enough for the borrower to pay off.
Location for the office building should be considered, as well as its design and workmanship. Physical factors, such as these, will affect whether businesses move into the area, and into that building. Commercial lenders will look at the market-wide statistics of the building, including whether or not there is a high vacancy rate in the community, economic vitality of the area and the development activity.
For a good quality office building, the typical interest rate varies between 6.5 percent and 7.5 percent over a ten year term with a 25-30 year amortization period. Since office buildings are so dependent on the market, local economy, location and other characteristics, it can be difficult for a borrower to secure a commercial loan in softer markets. If there is a high vacancy in the building, then financing most likely will not be approved. However, on that note, if the building has a good history of constant tenants, and is in a good location, then there is a good chance the loan will be approved by the commercial lender.
Any borrower should have an excellent business plan before approaching a lender. Understanding the market and viability of the area the office building is in will help determine if a loan is approved or not. Be sure to do the research before approaching a lender. Get more information
Understanding 504 SBA Loans
When a business is looking for a long-term, fixed rate loan for major asset purchases, a good financing vehicle for that is the SBA 504 loan program. Proceeds from these loans must be used to purchase fixed assets such as land and improvements to buildings, streets, utilities, parking lots and landscaping. The loan can also be used to construct a new building and purchase machinery and equipment. If new equipment is bought, it has to have a useful life and for at least ten years.
The 504 SBA Loan operates as a partnership between a third party lender, a certified development company and the borrower. These types of loans offer many benefits to business owners, including low down payments, below market fixed interest rates and long-term financing.
There are several criteria for qualifying for a loan, including the fact that the business must be a for-profit company with a net worth of less than $7 million. The SBA also sets caps on the net income of the business. The business applicant has to be the primary user of a facility, with a minimum percentage of 51 percent for an existing building, and 60 percent for a new building. A new job has to be created for every $35,000 provided by a Certified Development Company. Passive investment companies, non-profit companies, lending institutions and real estate development companies are not eligible for the 504 SBA Loan.
There are three parts to an SBA 504 Loan. The first part is a mortgage provided by a commercial lender, which can take up to 50 percent of the cost. This carries its own interest rate, terms and conditions. The second part is a loan through a certified development company, which can take up to forty percent with a maximum debenture amount of $1,500,000 for most businesses, $2,000,000 when meeting defined public policy goals, and $4,000,000 for eligible small manufacturers. This term can be as long as twenty years, with ten years for equipment. The interest rate for this is fixed and usually below market. The third part of the payment comes from the borrower, at around ten percent of the total cost. If the business is new, or a new facility is being built with the loan, the borrower may have to contribute as much as twenty percent. The down payment can be cash, equity in land, a building or existing equipment.
As the SBA 504 program can only be utilized to finance fixed assets, it is not the most ideal program if a prospective buyer wants to finance the purchase of an existing business. Goodwill, working capital, and other intangible assets are typically not eligible under the 504 program. This is also a program for “new money” and it cannot be used for refinance. If someone needs to refinance or needs to do a highly leveraged loan that is short on collateral, the SBA 7a program may be a viable alternative. Get more information