Florida is ranked number one in the top U.S. destination states for commercial real estate investments. Expectedly, this is a highly competitive market, with a full-scale commercial property costing upwards of $1 million. Since these property prices are beyond the reach of many, commercial property loans can be a great way to finance your dream commercial investment.
However, a commercial mortgage is a big financial commitment. Before borrowing, it is beneficial to know what to expect, what to consider and the right type of loan to choose. You also need to understand the different factors influencing loan approval and rates in the Florida market. This will go a long way in helping you make smart and informed decisions.    Â
Here’s some information to help you get started.
UNDERSTANDING COMMERCIAL REAL ESTATE LOANS
A commercial real estate loan is a mortgage to finance or refinance property used solely for business-related purposes. This includes raw land, apartment complexes, office buildings, warehouses, shopping malls and manufacturing facilities. Commercial mortgages are used to finance the acquisition, development or construction of property, making them an important aspect of any real estate investment.
DIFFERENCES BETWEEN COMMERCIAL AND RESIDENTIAL LOANS
Commercial and residential loans have many similarities. However, there are a few things that set them apart. Below are a few.
- Purpose of the loan: Commercial mortgages are used to finance income-producing real estate while residential loans finance a primary residence.
- Typical borrowers: Commercial mortgages are usually made to business entities. On the other hand, typical home loans are made to individual borrowers.
- Loan amount: Compared to residential loans, commercial loans feature larger loan amounts and require larger down payments.
- Loan term: Generally, commercial mortgages have a shorter term, higher interest rates and fees, and lower loan-to-value ratio.
IMPORTANCE OF LOCAL MARKET DYNAMICS IN FLORIDA’S COMMERCIAL REAL ESTATE SECTORÂ Â Â
Florida’s real estate market is both attractive and dynamic. Understanding local market dynamics is critical for anyone looking to make informed decisions. Some factors that drive the real estate market are economic indicators, interest rates, government policies and social trends. Issues like population trends and generational shifts, zoning and land-use regulations, tax incentives and neighborhood appeal can affect supply and demand. This can in turn influence property values. Â
FACTORS INFLUENCING APPROVAL OF COMMERCIAL REAL ESTATE LOANS IN FLORIDA
The approval process for a commercial mortgage can be lengthy and complicated. Several factors can influence your loan approval. They include:
CREDITWORTHINESS
Your credit score and financial history are critical factors that lenders focus on when considering your commercial loan application. Creditworthiness assessment affects the loan amount, repayment period and rate of interest. The more creditworthy you are, the higher your chances of getting approved for a loan.
PROPERTY VALUATION
Oftentimes, the value of the property you want to borrow a mortgage on will directly affect the amount of financing you are seeking. To assess the value of the property, lenders will collect data about comparable prices in the locality and the current state of the real estate market. They will also consider the location, design and quality, architectural features, square footage, age and life expectancy of the commercial property.
LOAN-TO-VALUE (LTV) RATIO
This metric is used to measure the total value of a mortgage against the value of the property. The higher the LTV ratio, the riskier the loan is for the lender. With commercial mortgages, most lenders prefer a maximum LTV of 65 to 80 percent. This means that you will need to make a down payment of 20 to 35 percent to be approved.
DEBT SERVICE COVERAGE RATIO (DSCR)
DSCR is a financial metric used to measure whether a firm’s operating cash flow can cover its debt service obligations. The ratio is calculated by dividing the net operating income by debt service. A candidate with a higher ratio is more likely to be approved for a loan.Â
ECONOMIC CONDITIONS
Certain local economic conditions influence loan approval. They include inflation, economic growth, interest rates and the local commercial real estate market conditions. You are more likely to be approved for a commercial mortgage in Florida when the economic climate in the state is sound and positive. Â
KEY CONSIDERATIONS FOR INTEREST RATES
Before taking out a mortgage, it is important to understand it. Interest rate is a key factor to consider; one that will have a significant impact on the amount you pay every month. Some key considerations for interest rates are:
MARKET CONDITIONS
The broader economic environment, which includes inflation, the real estate market, economic growth, mortgage-backed securities and the Federal Reserve’s monetary policy, affect interest rates. Generally, rates tend to increase when the economic outlook is good.
LOAN TERM
Shorter-term loans tend to have lower interest rates than those with longer payoff times. With shorter loan terms, you build equity in the property faster, rates are not likely to rise dramatically during the repayment period and the chance of something that will affect your ability to repay happening is reduced. This translates to less risk to lenders.
BORROWER’S FINANCIAL PROFILE
Your financial situation plays an important role in determining how much of a risky bet you are for lenders. Lenders will look at your income, expenses, assets and liabilities to understand your financial condition. A candidate with a good financial history and financial health is likely to enjoy lower interest rates on their commercial loan.
PROPERTY TYPE AND LOCATION
Certain commercial property types carry a higher risk for lenders. Similarly, the location of the property you want to buy in Florida can impact lender confidence. As a result, these two factors will affect how much the lender will charge to lend on the property.
TIPS FOR SECURING FAVORABLE LOAN TERMS
Commercial real estate loan terms can vary widely depending on a variety of factors. Below are some steps you can take to increase your chances of securing favorable loan terms.
Improve your credit score: To improve your creditworthiness, be sure to review your credit reports, pay bills on time, catch up on past-due accounts and practice positive credit behavior. Lastly, track your progress regularly to see how your credit score changes over time.
Enhance property value: A higher property value can help you secure favorable loan terms. To enhance property value, consider making improvements to the property, updating existing amenities, boosting curb appeal, enhancing structural reliability, increasing security and reconfiguring the space.
Work with experienced lenders: Experienced lenders have an in-depth understanding of the lending landscape. This puts them in a great position to help you understand the different options available to you and compare them. In the end, you are likely to secure better terms and conditions for your commercial loan.
In the end, numerous factors influence approval and interest rates for commercial mortgages in Florida. Before borrowing for commercial real estate, take time to understand these factors as well as what you can do to increase your chances of approval and secure favorable terms. Leveraging the insights provided above will help you make informed decisions in your real estate investments. For the best results, get in touch with a professional for further consultation or exploration of available resources.
At Prime Wealth Development, we provide business funding to meet your needs and help you succeed in the marketplace. Our financial services include commercial real estate funding, medical and healthcare loans, equipment financing and small business loan. For more information, reach out to us today. Our finance experts will answer any questions you may have, help you find the right funding option for you and walk you through the application process.
