A commercial loan in California is a loan that is used to purchase a piece of real estate for use as a business property or when individuals or firms want to invest in real estate. Essentially, commercial loans fund properties that are intended to operate a source of cash flow. Residential properties do not fit this description.
There are many different types of commercial loans. The type depends on the purpose of the property being purchased. A commercial loan could finance a hotel or motel, light industrial building, marina, apartment building, auto services building, bed-and-breakfast, mixed use property, mobile home park, multi-family unit, office, campground or RV park, convenience store, gas station, health care center, retail space, self storage compound, warehouse, or restaurant. Here are some of the most common types:
Traditional Purchase Loan
Purchase loans have fixed or adjustable rates, much like a residential mortgage. Interest rates are contingent on loan-to-value ratio, or LTV, and the property is used as collateral. There is some relative flexibility where credit and income is concerned with traditional commercial purchase loans.
Outstanding credit and high, steady income is often required for bridge loans, since they offer immediate capital on the short-term - typically one year - to suit a commercial project's beginnings, often from a private lender. Longer term financing should be pending while these short-term funds are borrowed.
Most used among lasting retailers and stable offices, the participating mortgageholder gives the lender a cut of the business or real estate revenue along with interest and principal payments every month.
Usually offered by private lenders because of their substandard requirements, hard money loans carry unusually high interest rates since they are particularly high risk. The property serves as the collateral for financing.
Credit and NOI
Commercial loans typically have strict credit and debt requirements, although the spectrum is wide thanks to the flexibility many private lenders offer. To have a credit (FICO) score of 700 or higher is ideal, but certainly many commercial loans have been approved for borrowers with credit in the 680 to 700 range. There is hope for borrowers whose credit is even lower, but lenders will look for compensating factors, such as a high net operating income (NOI), which should surpass the monthly mortgage by at least 25%.
Debt Service Coverage
Another factor lenders will examine is borrower debt service coverage, which is a ratio of the yearly net operating income over the mortgage payment. Businesses should have a debt service ratio of over 1.25, as determined by a licensed appraiser's estimates.
Debt Yield Ratio
Lenders will also consider a commercial loan borrower's debt yield ratio, which is their NOI divided by the total mortgage loan. A business with an NOI of $500,000 per year and a prospective loan amount of $7,000,000 will have a debt yield ratio of 0.0714, or 7.14%, meaning even if the property is foreclosed out the gate, the lender will receive a 7.14% return.
Commercial lenders, whether for small business, hard money or others can be difficult to find. Lender411 has a number of commercial lenders in its directory. Find one near you by filling out the form at the top of this page.
Los Angeles, San Francisco, San Diego, Sacramento, Santa Ana, Bakersfield, Fresno, Long Beach, Anaheim, Oakland, Hollywood, Riverside, Stockton, Santa Rosa, Pasadena, and other cities are all major sites for commercial development in California. But don’t assume that you have to be a sophisticated investor to purchase property in these areas. It’s true that real estate in many of these cities is in high demand, but growth is part of the game.
The U.S. Small Business Administration, or SBA, offers affordable financing opportunities to help small businesses grow. California has SBA District Offices in:
Generally, small business owners can finance their endeavors in two ways: equity or debt financing. The SBA has recommendations for the type of financing business owners pursue based on their debt to equity ratio. Debt is considered funds borrowed and equity is dollars invested but not owed.
Small business owners can receive funds through equity financing without acquiring debt. In exchange for ownership share, another company raises funds for the recipient. The SBA recommends business owners take the equity financing route if their business has a high debt to equity ratio.
For the opposite case - a business owner has a high equity to debt ratio - debt financing is a safe option, and recommended by the SBA. Debt financing is the borrowing of money from a lending institution or private lender, to be repaid over time, and usually with interest. The allowable loan amount, length of repayment term, and interest rate will vary depending on the lender.
Help Through SBA
Your local SBA office may be able to offer aid through the Financial Assistance Program. Eligibility depends on several factors, although special considerations may be made for franchises, farms, medical facilities and more. Here are the basic criteria for eligible companies:
To see if you qualify for special considerations, contact your local California SBA District Office.
California is ranked as the most populous state in the nation and represents 13% of all national gross domestic product. It is home to several major economic regions such as Hollywood, Los Angeles, Silicon Valley, and Napa Valley. Hollywood is known as the global center of entertainment, Los Angeles is a major international city, Silicon Valley is a leading global center of technology, and Napa Valley is one of several major global wine production areas.
The city of San Francisco is another globally recognized region that is known for international trade and its role in the development of the state’s financial system. Many major companies are headquartered here. San Jose, nearby, is the birthplace of much modern digital technology and boasts many major web companies.
California has nineteen major professional sports league franchises, more than any other state. If you’re interested in owning commercial property in an area that’s a hotbed of business, economic, and investment activity among a large and diverse population base, check out real estate in California. Lender411 can help you find the best commercial mortgage rates.
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