Unlike 30 year residential mortgages, commercial mortgage loans typically have shorter terms (5-10 years) and a balloon payment due at the end of the term.
Many commercial loans were temporarily extended during the worst of the financial downturn – sometimes referred to as “delay & pray” in the industry. But billions of dollars of those loans are coming due in the next few years.
If you have a commercial mortgage coming due this year or next, be proactive about the process of refinancing. The ability to refinance it will depend on several items that may be challenging if the commercial real estate market hasn’t fully bounced back in your area.
Commercial Lending Criteria
Here are some key lending criteria that come into play for commercial mortgage loans:
- The appraised value of the property
- Your current amount of equity in the property
- The Loan to Value Ratio (LTV) of the amount you want to borrow now
- The current cash flow and operating results for the property, both for the past couple of years and currently
- Current property use & occupancy
- Your business’ recent financial results and YTD financial results
- Total of other business debt
- Your business credit history
- Business owner/owners’ personal credit scores
For many small businesses, any one or more of these factors may be less than perfect at this point. And commercial lending is still tight, so lenders are asking for substantial documentation that you can handle repayment so be patient.
Also, even if your application is financially solid, your current lender just may not be interested in financing the type of property you own because the lender is managing it’s own risk within it’s total loan portfolio.
Be Proactive about Refinancing Your Commercial Mortgage
Check in with your lender early, so that you aren’t surprised. Put together all of the documents you’ll need and review them to see where you may have weaknesses – fix these if you can before filing for the refinancing of the loan. Check the credit scores of all owners/partners and correct any mistakes.
Shop around for other possible lenders in case you are turned down by your current one. You don’t want to be right up against the loan deadline and scrambling to find a new lender.
Be Prepared to Document
Be professional with your loan application to the lender – submit a complete package at the beginning and be timely with securing any follow up documentation you are asked to provide.
And figure out what your Plan B is ahead of time – if you’re turned down or receive a smaller amount than you need, how will you deal with having to pay off or partially pay down the existing loan?
And get legal advice about the loan documents, especially if the lender requires a personal guarantee from you as a condition of the loan.