Sunday, July 24, 2005
(ARA) - Unlike borrowing against your home, financing a commercial property, such as a store, office or apartment building, can be a confusing and frustrating experience. Borrowers are often subject to unwieldy demands and requirements imposed by traditional lenders, such as banks, since these lenders are regulated and generally averse to risk-taking.
Similar to other financial products and services like credit cards or insurance, many options exist for commercial real estate buyers and owners to choose from. "Consumers should take the time to understand all of the elements of a lender's mortgage program instead of simply focusing on interest rate," says Brett Evenson, managing director of the Commercial Direct division of Bayview Financial Small Business Funding, LLC, a firm that offers alternative lending solutions to small business owners or occupiers and commercial real estate investors. "Becoming well informed can save a borrower time and money during the loan origination process and in the future."
Here is a list of the eight most important questions every prospective borrower should ask before selecting a commercial mortgage lender.
1. Is the loan assumable?
Unlike residential mortgages, it is standard for commercial mortgages to charge prepayment penalties for early repayment of a loan. If you think there is a chance you may be selling the property at some point in the future, ask your lender if the loan is assumable by your property buyer. Assumable loans allow a buyer to take over the mortgage terms and loan payments. It is also an excellent selling point that can enhance the marketability of your property when you list it for sale.
2. Is there a balloon payment?
While balloons may be a useful option for residential borrowers looking to lower their rate, it is a requirement of most commercial programs for customers to pay off their mortgage early, generally in 3 to 10 years. A balloon loan will force you to go through the entire loan process again before the balloon date. This means spending thousands of dollars in closing costs, and risking a higher cost loan if interest rates have risen. Even worse, if you are in the midst of difficult times in your business or have vacancies in your property, you run the risk of not qualifying for a loan renewal with your lender. Programs which do not require balloons are thus superior to those that do.
3. What is the maximum amount I can borrow?
Really the first question is one you must ask yourself: what are my capital needs both now and in the future? The majority of borrowers would actually prefer to pay a slightly higher interest rate in order to maximize the amount of money they can borrow. More cash on hand means more capital to invest in your business or additional real estate.
Typically, commercial lenders will loan up to 75 to 80 percent of the property value, requiring the borrower to come up with a 20 to 25 percent down payment. On a $500,000 property -- that totals as much as $125,000 down. However, programs do exist that allow you to borrow in excess of 80 percent of the property value. If maximizing cash is your primary goal, then paying a higher monthly payment may be a small price for the added capital a higher loan-to-value ratio (LTV) provides.
You should also ask your lender if their program allows you to take out a 2nd lien mortgage, either at closing or in the future. Choosing a lender that allows 2nd liens will add flexibility in meeting your future capital needs, and will allow you to capitalize on your property appreciation without a costly refinance.
4. How soon will I have a solid commitment, and how soon can I close?
If you are shopping for a property and need to be pre-qualified for financing, or if you are just in a plain hurry to close, make sure you get a clear picture of your lender's timeframes. Unlike residential mortgages, traditional commercial lenders often must review your historical income statements, asset statements and other documentation before giving you the thumbs up on your loan application. This can take weeks before you learn whether or not the lender really wants to take you on as a customer. And then, even after your loan is approved, you still run the risk of being turned down by a bank's "credit committee."
The result is quite a bit of stress and uncertainty during the loan process. Make sure your lender provides you with clear and accurate information on approval and closing timeframes.
5. How much financial reporting is required, and what covenants must I make?
Beware. When obtaining a commercial loan, many borrowers are not fully aware of all of the future obligations imposed by the lender, beyond simply making the monthly payment. First, many lenders will require you to provide quarterly or semi-annual financial and operating statements on your business or property for as long as you are in your loan.
And, while continuing to provide these documents can be more than just a simple nuisance for small businesses, even scarier is the imposition of financial "covenants," which are guarantees you must make in the loan agreement about the continued financial strength of your business. If you don't think this is important, consider the fact that certain covenants could put you in default on your loan if you lose a tenant or experience a tough business period, even if you are current on your monthly payments! Be certain to ask your lender about reporting requirements and covenants. If the risk is not acceptable to you, find another lender.
6. Will I have to maintain minimum assets or deposits?
If you are looking to a bank for your commercial loan, ask your loan officer if you will be required to hold a minimum level of deposits at the bank in order to qualify for the loan. Deposit requirements can be a hindrance if you need future access to that cash.
7. What are the documentation requirements?
As many traditional lenders sometimes require endless amounts of documentation, it is important to ask upfront about the amount and the types of financial documents that are required. Locating and providing copies of leases, operating statements, tax returns, asset statements and other financial documents can be quite challenging and time consuming. Furthermore, many small businesses do not have the level of documentation necessary to support their income in order to qualify for a bank loan. Such businesses are usually best served by alternative lenders.
8. What are the total costs associated with getting the loan?
A little research upfront about the costs associated with the loan can potentially save you thousands of dollars. Be sure to ask about all costs you will be responsible for, including lender points, property appraisal, property survey, environmental reports, and any legal fees that might be associated with the loan. Some lenders will have less expensive alternatives, or will bear these costs altogether.
When shopping for a commercial mortgage loan, remember that there are vast differences between lender programs. Different loan programs should not simply be compared based on the interest rate. It is also important to remember that banks are not the only lending institutions out there. Many alternative lending solutions, such as Commercial Direct, provide customers with a simplified and flexible lending process, without the distraction of a bank's rigorous requirements. Asking the questions outlined above can save you time, money, and a big headache down the road.
For more information about loans offered by Commercial Direct, log on to www.commercialdirectloans.com.
Courtesy of ARA Content
Tuesday, July 12, 2005
(ARA) - More and more Americans are facing the reality that the financial demands of everyday living are getting in the way of their ability to save for tomorrow. They are not paying nearly enough attention to their long-term needs, especially the need to save and plan for retirement. Some people plan to simply work longer to better position themselves for the transition into retirement, but are not considering the possibility that they may not have the luxury of retiring on their own terms.
Changes over the last five years have also had a major impact on retirement prospects - the stock market can go down, and stay down for a long stretch; financial well-being is affected not only by domestic economic policies, but also by events in foreign lands and the security of our homeland; while income may have grown, health care costs have been growing at an even faster rate. These challenges can be daunting and leave many looking for a clearer path toward securing a comfortable retirement.
Prudential Financial's recently released study, "Roadblocks to Retirement," sheds new light on Americans' views about these challenges and how prepared they are to face them. According to the study, Americans' tendency to borrow and consume "today" is a national trend that affects everyone. Prudential Vice Chairman John Strangfeld notes, "Americans tend to have a black belt in spending rather than savings. People often delay their financial planning and later realize that playing catch-up is a tough proposition. As a result, they're not controlling their destiny."
Primary challenges that surfaced in the study include:
* When Retirement Arrives Uninvited
Issues such as downsizing, injury, health limitations or family emergencies can lead to a sudden and unexpected retirement. Four in 10 respondents indicate they were forced to retire, and nearly half of involuntary retirees were under the age of 60. Almost two-thirds of the people who unexpectedly retired said they were not financially prepared.
* The "Dream" Retirement Could Be Just That For Many
Among those who were forced into retirement, six in 10 said they are simply trying to make ends meet. Even among those who retired on their own terms, two-thirds indicated they are just living "comfortably." Fewer than half of all retirees said they were able to travel or vacation as they may have hoped.
* Many Expect To Just Work It Out
With retirement lasting 20 years or more for many Americans, their needs will change dramatically over this time. Retirement finances will need to last through the shifting demands. During the first ten years of retirement, seven in 10 Americans currently expect to continue working to supplement income and continue to build their nest egg. At the same time, 64 percent recognize they may be simultaneously coping with deteriorating health. In the second 10 years of retirement, 80 percent of respondents indicated health care was a top concern, with many retirees expecting to require nursing home care and/or run out of money.
Despite these challenges and a reluctance to save for retirement, for those who do, most don't consider it a burden at all. In fact, about 80 percent - across age, income and different ethnic/racial backgrounds - hardly notice the "lost" spending opportunity and ultimately feel happy about their savings toward tomorrow's security. There are tangible steps you can take now to prepare for tomorrow:
* Join your company's defined contribution retirement program, contributing at least at a level that fully qualifies you for the match, if one is offered.
* Diversify and rebalance your investments according to your financial needs and goals.
* Consider an annuity to generate lifetime retirement income from assets accumulated in Individual Retirement Accounts (IRAs) and employment-based retirement savings programs such as 401(k) and 403(b) plans.
* Consider life insurance to help provide income to a spouse or partner not covered by your retirement plan or not entitled to social security benefits after your death.
* Research the current costs of long-term care in your community and how those costs are likely to grow. Determine how much of your retirement savings and income you'd be willing and able to spend on long-term care services such as home care, care in a nursing home, or care in an assisted living facility.
* Consider the equity in your home when computing your total net worth and the sources of income you will have available during your retirement years.
Americans have clear retirement goals. However, many are not sufficiently informed to effectively plan for the transition to retirement. Almost half of Americans surveyed indicated they are perplexed about how to choose financial products to help meet their retirement goals. The most effective approach is perhaps the simplest, too - a return to the basics of sound management of household finances. That is, spend less, save more, start early, and seek professional financial advice. For more information on the survey and additional tips and resources to help you take control of your retirement strategy, visit www.prudential.com.
Courtesy of ARA Content
