Commercial Real Estate Loans – Overcoming Rejections
One of the most frustrating and confusing situations for a business owner occurs when lenders disapprove commercial real estate loans. Since rejected business loans are quite common, it is advisable for commercial borrowers to have a contingency plan in place for commercial loans.
Business owners are likely to be distressed when a commercial loan application is turned down and will be unsure as to why it took place and how to avoid a similar problem again. For each of the five primary reasons that a commercial lender might decline commercial real estate loans, a practical solution is suggested for transforming the rejected commercial funding into approved business loans.
Two reasons (tax returns and business plan requirements) could impact virtually all commercial loans. Many loan officers will begin their review of potential commercial real estate loans by stating "We will need to see at least three years of tax returns" and "Can you show me your business plan?" before proceeding.
Small business mortgage requests are sometimes too unique for a traditional commercial lender. In these situations (even if a business owner has an adequate business plan and favorable tax returns), it is not unusual for commercial borrowers to be declined for business loans by a traditional commercial bank.
The reasons provided below do not represent obscure issues. It is likely that two or three of the reasons described will be important for typical commercial real estate loans.
(1) Commercial Real Estate That is Used for Special Purposes. Reason number one for business loan rejections is that the lender does not make commercial mortgage loans for the type of business involved. In a typical example, fewer commercial banks are offering financing for bar and restaurant properties. In a similar fashion, an auto service business is often given expensive and unnecessary environmental stipulations. There are many special purpose commercial properties such as campgrounds, churches, funeral homes and gas stations that most traditional lenders have eliminated from their commercial lending program.
Strategy number one for converting the disapproved business loan into an approved commercial mortgage loan is realizing that there are reasonable options beyond traditional commercial lenders. There are capable lenders that are interested in special purpose properties. The best loan might be available only from a non-traditional commercial lender when traditional banks won't make the requested commercial loan.
(2) Tax Returns. Reason number two for commercial loan disapprovals is when loan officers find a problem on an income tax return that disqualifies a commercial borrower under the bank's loan guidelines. This "problem" will typically be related to net income after business deductions, but when loan officers review tax returns, there are many possibilities which will result in the same outcome.
Strategy number two for converting the declined commercial mortgage into an approved commercial real estate loan is to apply for a "Stated Income" commercial loan. Very few traditional banks use Stated Income (no tax returns, no income verification, no IRS Form 4506) for business loans. Borrowers should search for commercial lenders using Stated Income commercial financing. Unfortunately, this suggested solution will not work for all loans because of a normal maximum loan amount of about $2-3 million for a Stated Income loan.
(3) Cash Out Limitations. The third reason for rejection of business loans will be seen frequently during refinancing attempts which involve a need to obtain cash by the borrower. It is common for a traditional commercial lender to limit what the funds are used for and to restrict the amount of cash to as little as $100,000. Even though the bank will provide the commercial loan, if they won't offer the amount of cash requested by the borrower, this is equivalent to a loan disapproval.
Strategy number three for converting the declined commercial mortgage into an approved commercial real estate loan is to seek alternative business financing. An important goal for a commercial borrower is to find a lender that will not impose unfair restrictions in how refinancing cash is to be used.
(4) Collateral Required. Reason number four for commercial mortgage loan disapprovals is that the bank will not make a commercial loan without sufficient collateral such as a lien on personal assets.
Strategy number four for converting the declined commercial mortgage into an approved commercial real estate loan is for commercial borrowers to seek out lenders that do not "cross collateralize" assets as a condition for obtaining a business loan. This will provide greater flexibility for the commercial borrower and avoid unnecessary (and unwise) connections between personal and business assets.
(5) Required Business Plan. 0Reason number five for commercial mortgage disapprovals is when a bank's loan officer determines that the business plan does not support the needed commercial loan.
The fifth strategy is to avoid lenders which require a business plan, and this approach can save both time and money. This can result in several primary advantages:
(A) Decrease commercial mortgage costs by several thousand dollars. A typical business plan (prepared to normal bank specifications) costs $5,000 to $10,000.
(B) Reduce the period needed to complete business financing. A typical time for a business plan to be prepared is one to two months.
(C) Commercial financing approvals will involve fewer requirements when a business plan is not mandatory.
Unfortunately, the circumstances described in this article are responsible for many commercial finance difficulties. However, as noted above, the five key reasons for loan officers rejecting business loans can be overcome by most business owners. Similarly, with proper advice and strategies for small business mortgages, commercial real estate loans that are disapproved for other reasons (beyond the five issues described here) can also result in successful and effective commercial loans.
Watch the video related to Real Estate Loans
Quicken Loans TV takes you through a full home appraisal inspection in this informative video - part 2 (kitchen appraisal and basement appraisal) of the Quicken Loans Appraisal series. A home appraisal is something youll need when getting a mortgage. For more information on appraisals go to www.quickenloans.com
Help answer the question about Real Estate Loans
About Author
Stephen Bush is a small business cash management expert - learn how to avoid problems with business loans and obtain candid business cash advance advice at AEX Commercial Financing Group => http://aexcommercialfinancing.com
Advertisement
Blogroll
- avon Kudos
- Business Blog
- Business Life
- California Real Estate
- emergency bankruptcy filings
- House for sale in London
- Laferni
- MY PLACIA
- qualitative study
- Real Estate Agent
- riverzone
- Sell House Fast
- stocks momentum
- USLBC
May 22nd, 2009 - 17:41
you could use softer tone for start
good show
May 22nd, 2009 - 18:00
hugo, you give value “built-ins” such as microwaves but draw a clear distinction between them and stoves. so im wondering what value you extracted from the market for that microwave.
May 22nd, 2009 - 17:39
Commercial loans can work several different ways……here is one way:
A developer wants to start a project, first they locate people that invest in their idea (if they can't handle the expense themselves which is where most of the money is). Then they complete the project on time and under budget. Then one of two things happens, they either run the business or they sell the project to people who knows the field of the project. They then sell space to leasers or renters. Presto, commercial lending.
May 22nd, 2009 - 17:41
2-5 points
May 23rd, 2009 - 16:59
I owned a company that funded small businesses, micro-businesses, and mezzanine corporations. I searched for information on how you can start. Information is limited. I wonder why it is such a well kept secret. Possibly because there is lots of money to made financing business, but there also is a lot of risk. The only info is
http://www.businesslenders.com/why_history.htm
My advice is, unless you have unlimited financial resources, start small with micro-loans. They are easy to do and their is tremendous funding out there for companies and organizations to give consumers. Grants are available through the government for the micro-loans but only to organizations who give the loans. Banks also offer money as well as foundations.
If you have any questions contact me. I will assist you and if I do not have all the answers I will try to get them
May 24th, 2009 - 06:14
I know several agents that are mortgage brokers and real estate agents… it is not illegal.
They can NOT force you to use them for the mortgage, and if they give you "cash back" from their commission if you use them… their could be legal issues with that.
But offering you a mortgage as well as being your REA is perfectly fine.
May 25th, 2009 - 00:12
Cash for the land. A construction laon for the building, but you are going to need to give the bank 25% in cash for the down payment on that.
May 25th, 2009 - 09:33
Problem #1, you didn't shop enough
Problem #2, you actually signed for the 11% loan.
Talk to your friends and family, coworkers, etc… Get referrals to people that they've done business with and would trust to do business with again.
Unfortunately, high FICO's don't directly correlate to high IQ's, so anyone can be taken advantage of, regardless of credit. Your loan officer was either incompetent, a scumbag, or both. My money is on both.
May 25th, 2009 - 14:33
Your mom or dad. Better yet, kill your parents and take their house.
May 25th, 2009 - 15:00
Most government grants are in blighted areas where they want to spur rehabilitation of neighborhood properties. As far as I know there are no federal grants avalable unless you are revitalizing a property which will end up on the national register of historic properties, but these would have little to no profit potential due to the high cost of rehab to get the property to standards. The local programs generally only give 5-20k for help in rehabbing homes, but unfortunately come with so many strings attached that you will be begging them to take their money back just so you can get them out of your hair. Once you invite them in, you many times lose the grandfather clauses on any number of code requirements that have been put in place since the particular home was built and you have to spend as much if not more than the grant money to get the place up to the government standards that they require in exchange for the grant.
In my honest opinion, better to just get your own loan and go it alone….
May 25th, 2009 - 16:02
Cool…I never heard of these terms before and I've been involved with real estate for over 20 years in my career. Thanks for teaching me!
Apparently this has to do with 'Settlement', not really loans or mortgages. I found this:
"…You referenced a "wet settlement." This is a term of art, which means that when a person goes to settlement, the lender's funds must be on the table.
Compare this to a "dry settlement," where there is no money available at the closing. Usually, the settlement company or attorney will complete the paperwork, send the legal documents to the lender for review, and then the lender will fund the transaction…"
Found at this site: http://realtytimes.com/rtcpages/20060529_wetsettlement.htm
Looking forward to learning more,
Elise Altergott, Principal Broker
Associate Mortgage: http://www.web-mtg.com/?src=answers
Associate Consulting: http://www.ac-fl.com/?src=answers
May 26th, 2009 - 00:44
It will try to buy a $100,000 loan for $30,000 and hopefully forclcose and sell home for $40,000.