OBTAINING AN OFFICE BUILDING COMMERCIAL LOANS
Office buildings are a huge part of the community fabric. They create jobs, promote business, and generate revenue for the community. Specifically, those facilities that house multiple tenants, or tenants with strong credit ratings, are eligible for extremely favorable terms.
Property ownership may transfer multiple times over the decades, with new investors reworking the building, its tenants and its curb appeal. Of course, the investment process for office buildings varies from that of other property types. The success of office buildings are often driven through the location, skill of management and quality of tenants.
Financing depends on a number of factors aside from the borrower’s ability to repay the loan. Common factors loan brokers evaluate are the loan-to-value (LTV) and debt coverage ratio. Typically, excluding SBA financing, an office building will need a loan to cover 80-90 percent of the purchase price, with the investor putting a 10-20 percent down payment on the building. Also, the debt coverage ratio should not be less than 1.2, which would require the borrower to generate a net cash flow that is 120 percent of the debt service amount.
Aside from financing alone, other factors, such as the number of current tenants and the tenant turnover for previous years are also considered. If most of the tenants are only in their fourth year of a ten year lease, then it is possible, after looking at rollover and renewal scenarios, that the debt coverage ratio will not be enough for the borrower to pay off.
Location for the office building must be considered, as well as its design and workmanship. Physical factors, such as these, will affect whether businesses move into the area, and more importantly, into that specific building. Commercial lenders will analyze the market-wide statistics of the building, including the vacancy rate in the community, economic vitality of the area and local development activities.
For a quality office building, the typical interest rate varies between 6.5 percent and 7.5 percent over a ten year term with a 25-30 year amortization period. Since office buildings are so dependent on the market, local economy, location and other characteristics, it can be difficult for a borrower to secure a commercial loan in softer markets. If there is a high vacancy in the building, financing will most likely not be approved. However, on that note, if the building has a stable history of good quality tenants, and is also in a sought after location, there is a good chance the loan will be approved by a commercial lender.
As a rule of thumb, all borrowers should have a business plan on hand before approaching a lender. Understanding the market and viability of the area the office building is in will help determine the likelihood of the loan approval. Be sure to do research on your own before approaching a lender.
Ease of loan qualification is no replacement for quality market research. In your discussions with commercial lenders, it is best to come prepared with a detailed plan of action, as well as realistic cash projections. In addition, market knowledge allows you to capitalize on bargain investments that offer tremendous earning potential. For example: Properties with high vacancy levels generally require a large down payment due to their upside potential. This is because most lenders underwrite to a DSC (Debt-Service Coverage) first, which can be limited by low occupancy numbers. As with any loan, personal research and meetings with the lender can only help your business become more successful.