Financing and Commercial Mortgages

Your decision to purchase a commercial property is a momentous one for you. Quite a bit is at stake when you have taken on this large purchase. Hopefully, you could negotiate terms to make the deal successful for you. Besides the property’s purchase price, one of the most crucial things you must negotiate is the mortgage for the property. You likely do not have the cash or liquid assets available to fully pay for the property upfront. Even if you did, seeking a commercial real estate mortgage may still be in your interest for many reasons.

When you borrow money from a lender to purchase commercial real estate, it is a complex transaction. The loan documents will be lengthy and contain detailed terms you must understand and follow. Chances are that your initial contact with the lender will be far from the last one during the pendency of the mortgage. The success of a potential commercial real estate mortgage depends both on the terms you negotiate and your relationship with the lender.

Since a commercial real estate mortgage is a legal agreement, you should get help from a commercial real estate lawyer before you agree to anything. A commercial real estate attorney in St. Petersburg provides value in many ways when you are borrowing money to finance a property. If you have not already spoken to a commercial real estate lawyer, now is the time to do so.

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The Differences Between a Commercial and Residential Mortgage Loan

While commercial and residential mortgages have the same purpose of obtaining financing to purchase a property, you need to be aware of substantive differences between the two types of loans. In a residential real estate deal, you do not have as much of an ability to negotiate with the bank. The terms they offer you are not subject to change under most circumstances. Commercial real estate mortgages are more customizable. The bank understands that it is dealing with a more sophisticated customer, and they are more likely to be willing to customize their offering and negotiate with you. Further, you may not have the same protections as a consumer when dealing with the bank. You must understand exactly what you are committing to before signing on the dotted line because there may be dramatic financial implications.

Commercial loans usually have shorter durations than those of residential mortgages. In a residential mortgage, the principal is often paid back over 30 years, although some shorter durations are available. The longest possible commercial real estate mortgage is 25 years. Banks often do not want loans on their books for extremely long periods. In many cases, the original lender wants to package your loan with others and sell it as either a large portfolio or a security instrument.

Commercial real estate mortgages can be as short as five years. In addition, you will not have the same rate protection as residential mortgages. In the latter product, you may get a fixed rate for an extended time. Commercial real estate mortgages typically have their rates locked for the first five years of the loan. After that, your interest rate will reset based on the prevailing rates in the marketplace. Your rate can rise or fall depending on the overall interest rate environment. You are always taking a risk that you end up paying higher monthly installments than at the loan’s outset.

You Can Negotiate with the Lender in a Commercial Real Estate Mortgage

When taking out a commercial real estate mortgage, you may have more negotiating power. If you are a creditworthy borrower, you might have multiple financial institutions competing for your business. You may not need to accept the initial terms offered, and you may counter with your own proposed figures. If the bank really wants to win your business (especially because of the possibility of repeat future business), they may be flexible and willing to offer you better terms if you request them.

You may want to negotiate additional terms in a commercial real estate mortgage besides the interest rate. As part of your loan, you must agree with the bank on the following:

• The overall term of the loan
• The interest rate
• The amortization period for the loan (the amount of time that you will make payments, which can be longer than the term of the overall loan)
• The loan-to-value ratio, which is the percentage of the property that is financed (after you have made a down payment to the lender)
• The occupancy that you must have for the property at the time of the loan (the property often must be more than 50 percent occupied for the lender to agree to make the loan)
• The acceleration clause, which can allow the bank to demand immediate and full payment if you obtained other types of loans that they did not agree to
• A clause that can prevent you from repaying the loan early (the lender may lose money because they cannot keep receiving interest payments)

The terms that you can negotiate will have a direct impact on your finances. If you take out a loan on less than advantageous terms, you might be locked into a difficult financial situation that can increase your chances of defaulting on the credit and having the bank come and take your property in foreclosure. Therefore, you must closely review the terms and negotiate when possible. Ideally, you should compare terms from multiple lenders to determine which financing works best for you.

You Would Need to Carefully Negotiate the Terms of a Commercial Real Estate Mortgage

A commercial real estate mortgage is a contract between you and the financial institution. The bank agrees to provide you with upfront money to purchase the property. In return, you agree to make payments on the mortgage as required by the contract. There may be other terms that are a part of the contract that you must follow. If you or the bank fails to follow the terms of the contract, it may be considered a breach that can lead to a lawsuit. Further, if you fail to make the payments according to the contract, your property will be subject to foreclosure.

Once you sign the commercial real estate mortgage, you become obligated to follow the terms of the document since it is a binding contract. Thus, you need to put in the work now to review and negotiate the terms before the loan closes. You likely do not have the legal knowledge on your own to get into the nuts and bolts of negotiating actual language with the bank.

A commercial real estate attorney can advise you on negotiating the terms of your loan. They will review the loan documentation and highlight areas where to suggest possible changes in your own interests. Further, they will review your mortgage agreement for potential legal issues you need to be aware of. Your commercial real estate lawyer’s job is to look out for your legal interests at all times. Even if your business staff handles the negotiations with the bank, your commercial real estate lawyer will be working in the background to advise the negotiating team.

What if the Financing Falls Through?

There is a significant chance that the buyer may experience some bumps along the way when obtaining mortgage financing to purchase a property. Lenders have been tightening their standards in recent years, and they have done so even more, as there has been some recent stress in the commercial real estate market. Commercial real estate lending declined by 47 percent overall, as some prices have fallen because of a lack of occupancy in many properties. Some buyers may have already been approved, while others may take a chance that they can obtain the financing that they need to complete the purchase.

What happens next depends on the terms of the contract you sign. As the buyer, you may have had to put down earnest money on the property as part of the sales contract. Many contracts contain a contingency that allows the buyer to walk away from the deal if they cannot obtain a loan. Nonetheless, there is a chance that you can lose your deposit entirely if you cannot complete the contract, regardless of the reason. Hopefully, you negotiated a contract that protects you if your financing falls through because it is often not your fault. However, you may need to deal with an unforgiving seller who has experienced their own difficulties because you cannot complete the deal. The seller may claim that it was your fault you did not obtain a loan, and they may claim that they have a right to keep the earnest money.

You may need to engage with the seller to figure out a solution to the problem. You may renegotiate the terms of the deal to make it more attractive to potential lenders. There is still a chance that you can find alternate financing from another lender.

How a Commercial Real Estate Lawyer Can Help You

When you hire a commercial real estate lawyer to help with your transaction, they can perform a number of valuable tasks as far as the mortgage is concerned. A commercial real estate attorney can do the following for you:

• Review the loan documentation to ensure that it is correct
• Work to protect your legal rights and interests, both in the initial contract and in your dealing with the lender
• Ensure that the mortgage meets legal requirements and that there are no potential compliance issues for you
• Represent you in any potential disputes with the lender, either during the loan process or while you are in the repayment period
• Reviewing the title, so you are obtaining a free and clear title to what you have purchased
• Negotiating the terms of the loan with the lender

If you are purchasing a commercial property, you should always seek legal help from a commercial real estate attorney early in the process. Many things happening in the early phases of a transaction that can dictate whether it is ultimately successful and whether you can obtain the terms you need to make money. Otherwise, you might end up jumping into a situation that is not advantageous to you and causes financial trouble. Hiring a commercial real estate attorney is an investment you make to hopefully lead to the success of the deal.

Consult a Real Estate Attorney Before You Start Shopping Commercial Mortgages

A real estate attorney can provide valuable guidance from the start of the process. They have in-depth knowledge of the laws and regulations related to commercial mortgages, and they know how commercial lenders work. They can ensure that you are in compliance with all the necessary requirements, help you avoid any potential mistakes down the line, and save you from costly mistakes.

An attorney can also assist you in conducting due diligence before finalizing the mortgage agreement. They can help you review the property’s legal documents, such as titles and zoning regulations, to ensure that everything is in order. This can help you avoid potential complications or surprises in the future.

Consulting a real estate attorney before you start shopping for commercial mortgages is always a wise decision. By involving an attorney upfront, you can save yourself from unnecessary headaches and set yourself up for success in your commercial property venture.

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