Avoid Critical Commercial Mortgage Mistakes

By: Stephen Bush

Although it will not be easy, avoiding key commercial real estate financing mistakes is likely to eliminate critical commercial mortgage problems that often have disastrous consequences. The combined use of advanced investment strategies and proper precautions is likely to produce improved business finance results.

While we will not be addressing all possible commercial mortgage mistakes in this article, we will include several of the most severe issues to anticipate. In our experience, the potential difficulties involving factors discussed below are more serious and common than most commercial borrowers are likely to expect.

Inexperienced Business Finance Brokers and Lenders -

Commercial mortgage financing has recently become more popular with brokers and lenders that previously focused on residential real estate financing. More and more lenders and brokers are looking for alternative revenue sources due to residential financing difficulties. Many of them are devoting increased attention to business finance and investment loan services.

While this shift might eventually result in a positive outcome for commercial borrowers, the immediate impact is a sudden influx of inexperienced residential mortgage brokers and lenders attempting to provide investment advice for business financing and commercial real estate financing. For most business borrowers, the use of inexperienced business finance advisors will be a mistake of potentially serious proportions. As we have written about extensively, there are approximately 25 major differences between residential financing and commercial financing, and most residential financing experts are simply unprepared for business loan complexities.

SBA Loan Refinancing for a Commercial Mortgage -

Because it is more difficult to refinance an SBA loan or conventional commercial mortgage than many borrowers realize, it is advisable to thoroughly review refinancing options before completing the initial business financing if at all possible. The biggest potential business finance mistake involving an effort to refinance is likely to be an assumption that refinancing can be easily accomplished and whenever the commercial borrower chooses.

In reality most business and commercial mortgage refinancing situations will require less attractive terms than the initial business financing. Since acquisition financing includes terms not possible upon refinancing, this observation is particularly relevant for SBA loan refinancing. Another potentially critical mistake is to overlook short-term business financing options which will eliminate refinancing problems.

A major obstacle to refinancing a commercial mortgage, whether it involves an SBA loan or not, will be prepayment penalties and other financial restrictions that effectively prevent refinancing for several years. Short term possibilities should be considered if a borrower expects that commercial loan refinancing in the first three years of the business financing is likely.

Specialized Commercial Real Estate Investment Property Issues -

With more specialized commercial properties and investments, the potential for serious mistakes increases substantially because of the advanced business financing complexities. Commercial mortgage loan choices are also likely to be more limited because there are fewer lenders which will provide this kind of specialized commercial real estate financing.

Businesses involving apartments, offices and retail space are generally considered to be less specialized from a commercial lending perspective. This is due to the likelihood that potential users and renters of such properties are more interchangeable than for a business investment involving specialized uses such as a funeral home, golf course and gas station.

The business finance costs for more specialized properties are likely to be more variable and unpredictable than for office buildings, retail stores and apartments. For example, environmental and appraisal requirements for properties such as funeral homes and gas stations will be extensive and time consuming.

Solutions and Strategies for Avoiding Business Financing Mistakes -

The potential business finance mistakes described above can be overcome successfully. It is recommended that business borrowers find sources offering helpful strategies and background information which will provide a comprehensive comfort level for complicated commercial real estate loan factors. Business borrowers should thoroughly discuss business financing options with a business loan expert before refinancing or buying a commercial property or business investment.

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