Commercial Real Estate Financing

Real estate financing is the life blood of commercial real estate at all levels of investment. The tax laws and investment advantages of using debt to buy real estate are extremely favorable to investors. However, there are specific guidelines and demands when applying debt to a real estate investment that must be met to conform to the lender’s requirements and investing standards.

As an example, most lenders require 25-30% cash down payments in order to procure financing on a real estate purchase. With the current turmoil in the financial markets, lenders have been very strict about this equity participation by the investor. We have been seeing a trend with the banks recently that more equity is better. This increased equity gives the lenders more security against fluctuating property values and more certainty the borrower will be able to fulfill their payment obligations.

The standard commercial loan is structured for the smaller investor usually as follows: 25-30% down payment, 25 year amortization, interest rate lock for five years, and a prepayment penalty that is in effect for the five year rate lock. With the advent of the financial banking crises however, the financial markets have been using more creative means of financing properties such as variable rates, swaps, rate caps and other tools to achieve financing. For most smaller investors, the best strategy in navigating this complex market is to use the services of a knowledgeable commercial real estate broker and commercial lender.

The lending market for commercial real estate changes daily, depending on national and international events, the economy and the local real estate markets. Commercial real estate in the long term will still prove to be a very tax and financially advantageous investment when properly structured.

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