Commerical properties risky for buyers, lenders
Jessica White/DC Columnist
Issue date: 6/29/08 Section: Business
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My friend and I want to buy a commercial property. We thought we had one identified (a strip mall) but then we decided not to pursue it for various reasons. What is a good interest rate on a commercial deal?
Thanks!
M & C
Dear M & C,
You ask one simple question and it is hard to know where to begin. I guess I will start with the question you asked: what is a good interest rate for a commercial deal?
Lenders dread this question for a very simple reason: there is no one interest rate out there for all buyers. There is a range of rates - and loan programs - and a lot of information is needed about the buyer before a lender can quote an interest rate. The buyer's credit score and the amount of money the buyer can put down are two very important factors for determining an interest rate, for example.
However, for residential lending, in all instances the collateral is the same - a single family home. Because the collateral is always going to be a dwelling, and the repayment source is always going to be the buyer's income, borrowers can get pre-qualified for a residential purchase. That the particular dwelling has not been determined yet does not matter.
The lender can qualify the buyer for any dwelling of a certain type (single family house, condominium, two to four unit property or cooperative) based on the strength of the buyer.
Commercial purchases are entirely different. You cannot get pre-qualified or pre-approved for a commercial deal. Why? First, in each case, the collateral will be different. Say you want to spend $1.5 million on a commercial property. Are you buying a multifamily dwelling, retail shopping center, day care center, gas station, bed and breakfast, bowling alley, trailer park? You get the idea.
Each type of property will have a different down payment requirement. For example, a multifamily dwelling will require less money down than a bowling alley because a multifamily dwelling is more desirable to the lender than a bowling alley.
Second, each property will have a different debt service coverage ratio (DSCR). If you are looking for a commercial property, you will soon learn to de-romanticize all the properties you look at and instead see only the numbers. Does it make money? That is the key question. And if so, how much? Can the income of the building carry the mortgage?
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