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How to Finance Commercial Real Estate

For the party interested in making money in commercial property, how to finance commercial real estate is basic. Financing for commercial real estate projects comes from private investors, insurance companies, savings and loan institutions, mortgage bankers, and regional banks. Terms vary depending upon the kind of real estate as well as whether it is a large mall, small retail center, or a corner store. The availability of credit and terms will vary with the health of the economy nationally as well as regionally. How the commercial property is going to be used is important as it tells the lender what kind of cash flow the property will generate. It is, in the end, the anticipated income that use of the property will generate that will determine if a buyer can get financing and how favorable the terms will be. How to finance commercial real estate, then, comes down to finding a business that will make enough money to pay the rent and, thus, the mortgage. Last week we posed the question, “Why invest in American real estate?” The answer had to do with predictability, rule of law, stability, and a recovering market. As the US economy pulls itself up by its bootstraps how to finance commercial real estate will be to find a business that is thriving in the recovery and put it in the commercial property.

How to start investing in real estate will typically not be with worrying how to finance commercial real estate, with one exception. The owner of a profitable business may choose to be both the renter and landlord in a new office, factory, warehouse, or other commercial facility. It is common, in fact, for a successful business with a strong cash flow to move out of space that it is renting into its own property. It will use its strong cash flow to obtain favorable financing. It will use its presence as the premium business in a complex to attract other businesses with good cash flow as well. In such a set up the company that builds the project will look forward to writing off the depreciation of the property as well as collecting the rent. It will essentially be paying itself as the business arm of the operation pays rent to the real estate arm. In these types of set ups the principals will be wise to obtain sound legal and tax advice and to so structure their business in such a way as to take the most advantage of the operation and stay within the bounds of local, state, and federal tax laws. How to finance commercial real estate most effectively will be to do business most profitably to attract profitable businesses to rent or lease space in the facility. To the extent that a profitable national franchise or other business can be enticed into renting in the commercial space they will have the credit history, not to mention clout, to help the commercial real estate owner obtain the most profitable terms.

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