If your small business is in the market for real estate, you're probably going to need a commercial mortgage to help pay for the property. Commercial mortgage agreements can be fairly complex. You'll need to stay involved throughout the application process or hire a lawyer who can do this for you.
Documents for a Commercial Mortgage Application
For most commercial mortgages, you will need to submit documents that report your business earnings for at least the last three years. If you are not able to submit these documents, the lender may require you to provide a personal guarantee.
Other documents you may need to complete the mortgage application include current business leases, statements that report the value of all business property, the original formation documents for your business entity, and copies of prior business tax returns.
Debt Coverage Ratio
Once the commercial mortgage application is complete, an underwriter will review everything you've submitted and decide whether your business will get the loan. Part of the underwriter's review is a calculation of your debt coverage ratio. The ratio compares your monthly business income to the monthly debt payments your business can afford.
If the underwriter requires a minimum ratio of 2-to-1 to approve the mortgage, it means that your business must earn at least two dollars for every dollar of monthly debt payments it will make.
Commercial Mortgages Have Covenants and Restrictions
Commercial mortgage covenants and restrictions commonly require more than just repayment of the loan. They may obligate you to periodically submit financial statements so that the lender can monitor your ongoing ability to repay the debt. In many cases, the mortgage will require that your business maintain certain levels of cash or earnings.
When your numbers fall short, the commercial mortgage agreement usually allows the lender to automatically charge penalties and fees. The lender may even be able to foreclose on the property.
What Your Commercial Mortgage Will Really Cost
Buying commercial property is practical only if it helps your business earn money. Therefore, you must understand the details in the mortgage agreement before you sign. If your lender charges points, for example, you need to increase the interest rate by those points to calculate your actual interest charges.
You also need to consider the extra charges for which you are responsible, such as the bank's legal fees, application charges, survey fees, and appraisal fees.
A Commercial Real Estate Lawyer Can Help
The law surrounding commercial mortgages is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. We hope you found it useful. For more detailed, specific information, please contact a commercial real estate lawyer.