Commercial Real Estate Loans: What You Need to Know
Commercial Transactions are Different than Personal Loans
This is an article from the Bank’s financial education series Connections: Life & Money
By Bob Addoms, Vice President Commercial Banking, Mars Bank
Applying for a commercial real estate loan is vastly different from applying for a personal loan such as a residential mortgage, home equity loan or even a credit card. In order to approve a commercial real estate loan, a bank analyzes real estate properties using unique tools. These tools take into account:
- market rent and sales data,
- sensitivity to fluctuations in interest rates, and
- pro forma calculations which consider local real estate market dynamics.
The result of this process ensures the right loan structure.
Commercial Loan Details
Commercial real estate terms can be intimidating and leave applicants confused. Examples of such terms:
- absorption rate,
- cap rate,
- common area maintenance,
- income appraisal approach,
- highest and best use,
- debt coverage ratio,
- ground lease,
- net operating income,
- operating expenses, and
- vacancy rate.
These are commonly used terms which require understanding in order to facilitate communication between bank and borrower. Good communication and understanding will ensure a sound business decision for both.
Mars Bank Commercial Banking Officers have the experience and training to guide business owners smoothly through the loan application process to the closing table.