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How Do Commercial Real Estate Loans Work in California?

Currently, the index value of the commercial property price in the U.S. is 185.62, as reported by Statista. Over recent years, this cost has gradually risen due to factors like the state of the economy, increased demand for housing, and rising interest rates. On the other hand, construction costs for a particular property depend on several factors, including location, size, and value of the land. For example, the average cost of renting one square foot of office space in California is $481.95, which is much higher than the industry average, according to Statista. In California, the prices are driven by labor and material costs, which have surged about 25% in the past decade, according to the Terner Center for Housing Innovation. Given the high construction costs in California, real estate loans are vital. Here is a look at how commercial real estate loans work in California.

California Real Estate Loans

Unlike the standard residential mortgage that aids in purchasing or building a residential property, a commercial real estate loan finances commercial property projects including:

  • Purchase of a commercial property
  • Construction of a commercial building
  • Renovation of a commercial building
  • Refinancing commercial property at lower interest rates

It is worth noting that you can access up to $15 million worth of commercial loans in California, according to the California Credit Union (CCU).

Factors Determining the Approval of Commercial Real Estate Loans

Although the process of applying for a commercial loan in California is straightforward, the lender may either approve or reject your application based on several factors, including:

  • Business Finances – According to the National Federation of Independent Business (NFIB), over 80% of small businesses in the U.S. fail due to cash flow issues. These problems can result from property damage, lawsuits, or a lack of demand for products. For this reason, most lenders consider small businesses as high-risk customers, so expect them to scrutinize your business finances before approving your commercial loan. More specifically, the lender will calculate your debt service coverage ratio, which is the ratio of the annual net operating income (NOI) of your business to the annual total debt service. This ratio basically indicates whether your business is running at a profit or a loss and whether you will be able to repay the loan. Additionally, the lender will also check your business credit score to determine your loan eligibility.
  • Personal Finances – Because small business owners are typically the sole managers of the company, lenders also look at their personal finances. For instance, if you have a good credit score with a reliable source of income, the lender may consider you low-risk and offer you a commercial loan. Contrarily, the bank may reject your application if your finances indicate an inability to repay the loan.
  • Size of Property Occupancy – To qualify for a commercial real estate loan, your lender will require your property to have at least 51% occupancy by your business. Otherwise, you should consider an investment loan, which is usually suitable for rental properties, considering the occupancy can go lower than 51%.

Where to Get Commercial Loans in California

Once you know how commercial loans work in California, you should now embark on finding the right loan at suitable interest rates. Any of the following institutions will offer commercial loans:

  • Banks – You can get a commercial loan from a reputable bank at affordable interest rates, although most banks only offer up to $1 million worth of loans to small businesses. The downside of borrowing from banks is that the application process is slow due to the strict and detailed underwriting measures, as well as increased banking regulations, as reported by the National Association of Realtors (NAR).
  • SBA loans – Although the Small Business Administration (SBA) doesn’t finance small businesses directly, they partner with lenders and set regulations on business loans to help make them easily accessible by small business owners. It also reduces the risk for lenders in case the borrower defaults on the loan, with the SBA repaying the lender up to 85% of the loan balance. There are different types of SBA loans, so carefully choose what is suitable for your business.
  • Commercial Lenders – These are financing companies that approve commercial real estate loans faster, due to their less rigid underwriting measures. While you may access a loan within a few weeks from application, the interest rates are relatively higher.

Other commercial real estate loan lenders include conduit lenders, P2P marketplaces, and hard-money lenders.

Other Requirements for Loan Application

  • Company certification
  • Proof of citizenship
  • Tax returns of up to 5 years
  • Projected cash flow throughout the term of the loan
  • A business plan outlining how you will utilize the loan
  • Business records
  • A third-party appraisal

Based on the size of the loan and the repayment period, the lender will also offer you other terms of repayment, including a grace period during which your loan will not accrue interest, as reported by CBNC News.

Use these insights to get the right California real estate loan for your commercial property construction, renovation, or refinancing. Do you have any additional questions about how commercial real estate loans work in California? At Fidelity Mortgage Lenders, we’re here to help. Contact Peter directly at PSteigleder@FidelityCA.com or give him a call at 818.422.8879.

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