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Wednesday, April 9, 2014

Commercial real estate financing alternatives

Commercial real estate is subject to different lending requirements by financial institutions than residential property. This accounts for a different and sometimes more complicated financing process and may cause borrowers to seek alternative forms of lending to traditional commercial mortgages. According to the following Westwood Net Lease Advisors slide show, borrowers have four realistic alternatives for financing their commercial real estate including U.S. Small Business Administration loans and stimulus money.

4 unusual ways to get financing from WestwoodNetLease

One reason why commercial real estate financing is ore difficult than residential financing is a difference in the mortgage application approval process and requirements. For example, according to the Mortgage Reference Library, commercial mortgages are riskier, and therefore often involve a higher down payment. Commercial real estate loans also tend to have higher interest rate costs than residential loans.

If offering a high down payment is not possible, SBA commercial loans provide up to 90% guarantee, which influences how much down payment is required. These loans are applied for via the SBA's 504 Loan Program. Among the eligibility criteria for these loans are for-profit business status, applicant net worth below $15 million and a projected cash flow that allows timely loan repayment. These loans are not available to property speculators or rental real estate businesses per the SBA.

Another interest financing option highlighted in the above presentation are tax penalty free retirement account transfers. In other words, a provision within tax rules allows commercial real estate businesses to finance themselves through plans such as 401(k)s and Individual Retirement Accounts. One limitation with this financing option is it is only allowable provided the money is transferred to a  C Corporation. Since this is a larger type of business structure than S-Corporations and sole propietorships, it targets businesses that have greater economic impact.

Just as with residential property purchases, seller financing also provides an alternate financing opportunity for commercial real estate businesses and investors. These terms are not subject to the same policies that standardize mortgages at financial institutions and therefore vary in cost, duration and down payment. Owner financed loans may also be negotiable in some cases, especially if the property has been on the market for a long time. Negotiable terms also afford borrowers more flexibility. As with any real estate purchase, before agreeing to this type of loan it is wise to research the property for existing mortgages, title registration liens etc. if it has already been built.

Business friendly regulations have also made the commercial real estate financing process easier. Moreover, according to a published white paper on the topic, a U.S. Code stipulation allows business income tax deductions of up to $500,000 for qualifying equipment and business property assets. Said differently, some commercial property related purchases can be at least partially financed via retroactive tax breaks. The details of this deduction are viewable in IRS Publication 179. An additional tax benefit is allowable depreciation on commercial real estate.

Overall, if a commercial real estate business venture has a good business model and proven capacity to generate revenue and profit margin, then viable financing alternatives exist. Moreover, in cases where property is exchanged, financing may not be required at all provided the transaction meets the criteria of 1031 real estate exchanges. The National Association of Realtors also points out that this type of transaction postpones realization of capital gains tax in addition to providing a cashless transaction opportunity.