BATTLECALL GUEST EXPERT: Stephen Bush, AEX Commercial Financing Group

We were recently asked what we consider to be the most important qualities to look for in commercial mortgages. The person asking for this assessment recognized as we do that a commercial real estate borrower usually can't have it all: if you can't find all of the commercial mortgage qualities that are important in a particular commercial mortgage, then which qualities should be viewed as the most critical?

Before we provide our advice on this matter, we do need to point out that for some borrowers there may only be one or two critical qualities that will be essential to the success of their loan. For example, if a commercial borrower needs to refinance a business property and get $1 million in cash to do with as they choose, the ability to get unrestricted cash out will probably supersede all other loan qualities.

Aside from special situations like that, we are providing our advice about The Top 5 Strategies based on commercial mortgage qualities that we consider to be repeatedly critical to the long-term success of a business. We are not attempting to rank these five commercial mortgage strategies in any particular order.

1. Commercial mortgage borrowers should seek out lenders using Stated Income Commercial Loans and Limited Documentation Requirements (Stated Commercial Loans and Stated Business Loans).
 
Very few traditional banks use Stated Income (no income verification) for a commercial real estate loan. Many/most commercial lenders will perform a thorough income verification as part of their underwriting process. This will typically include copies of tax returns as well as a requirement to sign IRS Form 4506 which authorizes the lender to obtain tax returns directly from the IRS. Many/most traditional banks require income verification/audits even after the commercial real estate loan closes. Most commercial borrowers won't believe this until it happens, but some commercial loans will have covenants stipulating that the lender must receive financial data even after the loan closing and that the loan can be recalled if the audit of this data is not satisfactory to the lender. Stated Income Business Loans are no longer just a strategy to get a commercial borrower qualified that could not qualify any other way. It is truly a vital method to protect the commercial real estate borrower's overall financial interests, both before and after the loan has closed.

2. Avoid commercial lenders that charge an up-front commitment fee. Lenders should not charge an up-front commitment fee (and commercial borrowers should not pay such a fee). Please note that we are not including processing/retainer fees in this discussion of commitment fees. We view processing/retainer fees as an acceptable and standard business practice when dealing with commercial loans.

More and more traditional banks as well as many other commercial lenders charge an up-front commitment fee for commercial real estate loans. This disturbing trend does have a positive aspect: it provides a very clear signal about who you should take your commercial real estate loan business to, since we believe that this is the clearest possible signal (by not charging an up-front commitment fee) of a lender being sufficiently confident in its abilities that it simply does not need to charge such a fee.

3. Commercial real estate loans under $1 million should be assumable.

This is all about flexibility and providing for a more orderly transfer of your business to someone else in the future. It is also an example of using contingency planning to select a commercial lender by anticipating future circumstances and selecting a commercial real estate loan that will help you adapt to those circumstances.

4. Seller seconds and other variations of subordinate financing should be allowed.

This will permit the most aggressive Combined-Loan-to-Value (CLTV) for commercial mortgages, up to 95% of the property value. This is important if you are the buyer because it will provide another financial tool to help with financing. It is important to the seller because it might enable someone to buy the property who could not otherwise do so.

5. Commercial mortgage borrowers should seek out long-term commercial mortgage loans that are not subject to recall or balloon payments.

Businesses should not be financed with short-term funds. It is essential to obtain long-term financing of at least 15-20 years (and longer is even better). This is another prime example of using contingency planning to help you adapt to unknown future circumstances. Commercial borrowers should expect to encounter higher interest rates for longer-term financing (when compared to short-term traditional bank loans). However, most commercial borrowers will be pleasantly surprised when they see lower monthly payments in spite of a higher rate. The resulting improvement in positive cash flow can be the critical difference that creates a truly successful business investment.