Commercial Finance Is Still Available In A Tough Market
It's no secret that mortgage lenders have actually been stingier today with their dollars
, then in the past. This is true both in the residential and commercial estate industries; it's just more complicated today for developers to find the funding they have to set up their office buildings, multi-family jobs or subdivisions.
Obtaining financing, though, is especially challenging for commercial developers. This isn't surprising. Lenders have seen record numbers of defaults and foreclosures since the Great Recession began in 2008. These foreclosures have cost lenders a significant amount of money, and they've made them skittish when making loans to developers.
This means that today's commercial developers must bring projects of the highest quality to traditional mortgage lenders if they do expect to receive commercial financing.
For instance, lenders are more likely to provide mortgages to builders who present them with a project that is already significantly pre-leased. A multi-family project that has already leased out 70 percent of its units is a good bet to receive commercial financing. A retail strip center built on spec, in which only 20 percent of the available storefront spaces have been leased, will probably not receive commercial financing from any lender. The risks of an eventual default are too high.
Other project factors will help determine whether commercial developers will qualify for financing, too. As in all matters real estate, location remains an important consideration. Lenders are more likely to pass out commercial financing to projects in desirable locations. For instance, an apartment complex in a college town with plenty of students looking for housing is more likely to earn financing. A retail center located across from public transportation or in the middle of a densely populated urban center is more likely to receive commercial financing than is a similar project located on the far edges of the suburbs.
The tenant mix of projects matters today, too. Lenders want to support developments that will be filled with reliable, steady tenants. That's why medical office buildings are such popular projects today. Medical providers are viewed by lenders as safe bets; they have built-in customer bases and their services are in demand no matter how the economy performs. Retail centers that are anchored by grocery stores are also good candidates for commercial financing today. That's because consumers have to eat, no matter how bad the economy gets. And when they're shopping at the grocery store, they'll be more likely to visit the shops surrounding this grocer.
Finally, the operator of the project is important, too. Lenders are more likely to provide commercial financing to projects that will be run by operators with experience in their field. A senior housing center project is more likely to receive mortgage dollars if it is being run by an operator that has successfully run senior centers across the country for decades. If you bring a seniors project and propose a rookie operator -- or if you suggest that you'd rather operate the senior center yourself -- don't expect many lenders to provide you with funding.
Obtaining commercial financing is no easy task in today's real estate market. Lenders are more selective than they've been in decades. But if you bring the right projects to lenders, your chance of obtaining commercial financing remains high.
by: Timothy Capper
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