Expert Advice

Financing Commercial Real Estate Transactions

Financing Commercial Real Estate Transactions

For anyone who has done or is in the process of doing a commercial transaction, you know it can be a very challenging experience. One of the biggest challenges is to be able to source financing to complete the transaction.

Many clients will be able to arrange their own funding, but there will be occasions where the client will need your assistance and knowledge of financing options and alternatives. Although banks are the traditional source of commercial financing, they are not the only source, and often not the best source. In addition to the usual appraisal and environmental reports, they look at personal net worth and often want to secure the loan with a mortgage on the client’s house.

However, there are options. One is what I like to call non-bank “institutional” lenders. These include pension funds, life companies, credit unions, commercial lending institutions, second tier banks and foreign banks, and many mortgage lenders who manage money for larger investors, including the pension funds. Although these funds act like banks and have a process for loan approvals, it is far less bureaucratic and onerous. Their business is to source mortgage loans for their clients or for their own funds, and manage the investment.

For smaller loans, say under $2,000,000, private lending sources are often an option. These can be arranged and funded quickly. Although the rates are higher and there are fees paid to the person arranging the loan, for clients that want to close quickly, this is a good way to fund on a short term basis while the Buyer turns the property around, increases cash flow and then looks for a longer term, more permanent mortgage.

 Another option, especially for more difficult purchases, and a cooperating seller, is a Seller take-back mortgage. This form of financing isn’t used as often as it should be. Again, this will allow a buyer more time to reposition his investment and then look for more permanent financing.

A Seller take-back can also be advantageous to the seller, since it will give them an opportunity to defer capital gains and income taxes on the sale over the term of the mortgage, rather than pay a large sum in taxes on the completion of the sale. It can also be used as effective estate planning tool.

Remember, a good mortgage broker or knowledgeable mortgage person can be your best resource to complete a commercial transaction.

Written by:

Paul Lokash

Sales Representative, Commercial Division

RE/MAX Realtron Realty Inc., Brokerage.




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