We all know closing a commercial real estate purchase contract can be complex. That’s especially true when the buyer is relying on financing. Even the most experienced investors get waylaid by unexpected issues that can delay the closing — or derail the deal.
That’s why buyers who plan to finance a commercial real estate purchase should consider these pitfalls while performing due diligence:
1. Tenant leases. Commercial real estate lenders tend to scrutinize the seller’s leases. One thing they want to know upfront: how many of those leases are about to expire. If the seller’s leases lack automatic renewal clauses or several tenants are nearing the end of their leases, the lender may lower the loan-to-value ratio, insist on lease extensions prior to closing — or decline the loan altogether.
2. Tenant mix. Where the commercial property is fully occupied, the buyer still may have difficulty securing purchase financing if the tenant mix includes too many high-risk businesses. Current examples include hair salons and restaurants. The problem is compounded if these tenants have a history of late payments.
3. Rent payment history. If a seller routinely receives late or partial rent payments, that will be flagged by the lender, especially if the buyer is seeking long-term financing. Ideally, the seller can provide a history of on-time payments or bank statements that show steady deposits. If not, the buyer may need to negotiate alternative financing options, such as bridge financing, to stabilize the property.
4. Buyer not in the trenches. A buyer’s lack of experience in the market is a red flag for lenders. For example, if the buyer has a history of small fix-and-flips and now they are looking at a $10MM deal, the lender may decline as the exposure due to an inexperienced buyer may be too great. One way to overcome this objection is for the borrower to bring in an experienced partner that meets the lender’s criteria before submitting the loan request.
5. The buyer lacks liquidity. Lenders do not want to engage in a discussion of how the buyer plans to raise funds needed to come to the closing table. It is not uncommon for buyers to have some equity in the deal and then have an investor group that comes to the table with the remainder. This is an acceptable practice, but the buyer should have all this sorted out before getting in front of the lender. You only have one chance to make a good first impression, and a borrower’s lack of cash makes lenders nervous.
Boulder Equity Partners LLC is a nationwide lender for a variety of commercial real estate loans, from low-interest, long-term financing to short-term bridge loans that can be migrated into long term options. Purchase financing of commercial properties can be challenging for buyers, with many potential pitfalls that can kill an otherwise solid deal. Boulder Equity Partners excels at identifying these pitfalls and solving for them before they threaten the sale.