No doubt you’ve heard about the commercial real estate bubble, this the ugly truth that lenders and other reporters don’t want you to know. Despite all the hype, its not all commercial property is in trouble. The key for you as an buyer is to avoid certain pitfalls and learn from the other investor’s mistakes. Richard Weldon Crowder
Before the monetary and credit rate of growth that has led into the recent downturn, typical lenders capped loan sums at 65 percent of the value of the property. Which means that your $20 million commercial property would qualify for a maximum loan of $6. 5 million. The current difficulties with commercial property investments started out when hedge funds and equity lenders started offering much higher loan to value ratios, meaning they would lend against your investment property with as much as 80 percent of the cost of the real estate.
Mistakes Made by Commercial Investors
Some traders made a decision to refinance their $12 million commercial property for $8 million and get $1. 5 million away tax-free! What seemed like a great deal at the moment has come back to ruin the normal commercial property investment. The challenge was that these loans must be refinanced after five years. Owners who pulled money out of their investments such as this started out down a path that has led to the troubles we are finding now.
Fast forward from then to now and you’ll see that the whole financial climate has transformed. Most sources of auto financing for commercial real house have dried out. Owners with a property that should be refinanced are finding that unless of course the LTV ratio is 65% or less and the property is executing perfectly, it’s almost impossible to get refinancing for their commercial property investment.
You can’t tap into those hedge funds and private equity organizations because many of them have become out of business. Thus you are playing two options:
1) Make a work out with the existing lender where they refrain from foreclosing against your property in exchange for a slight increase in the interest rate, or other benefit that you can give the lender. Occasionally the benefit to the lender is they no longer need to take your property back. The fact is that the lender really doesn’t want to take back your home if they can avoid it.
2) Bring other shareholders into your deal by providing them a good rate of return on their investment along with giving them a portion of your equity. Generate sure to speak to a commercial property investment lawyer who can help make sure that you meet all of the SEC guidelines if this is the path that you decide to go down.
What Makes a Safe Business Property Investment
The problem numerous owners of commercial properties today is that they got into a deal with a bigger loan than they have to have. Now, these commercial property owners can’t ride your recession because the lending options are coming due and they are short, or worse, upside-down.