Getting mortgages on your corporate real estate holdings is different from getting other types of business debt. The long term nature of most mortgages coupled with the fact that they cover two things at once - your business and your real estate - makes them require a different application and financing process than other types of business debt. With this in mind, companies, both large and small, frequently make the same mistakes when they go out to the financing markets. Here are five that you can avoid:
Disorganized Supporting Documentation
When your lender analyzes the application package to grant you a corporate real estate mortgage, it needs a voluminous quantity of information. Furthermore, most lenders won't start the clock running on the approval process until they get a complete package of data. If you don't have the right information in the right format at the right time, it can delay your loan's closing. Information that is inaccurate can also prevent you from getting the loan. While the data you need varies, you can expect to have to submit detailed information on your business's financial prospects, plans for how you will use and pay for the building, and property information including reports produced by unaffiliated third parties.
Inadequate Cash Reserves
Even more than being in the business of lending money, your lender is in the business of getting the money it lends back. As such, it will look at your company's cash and cash equivalents and other liquid assets to ensure that you have the strength to service the loan even if the economy or your business experiences a hiccup. While reserve requirements vary based on the lender and the type of corporate real estate mortgage you're taking out, having at least six months' worth of loan payments set aside is usually a minimum. If your building has a multi-tenant component, you may also need to set aside reserves for the cost of replacing tenants that move out.
Using a Non-Specialized Attorney
Corporate real estate mortgage agreements are typically lengthy and complicated. As you review and negotiate loan documents, having an attorney that understands the process and the general business practices of getting a corporate real estate mortgage helps to expedite the process. An attorney who is inexperienced in the field, no matter how effective he is otherwise, could get lost in unimportant minutia or fail to spot the most important issues because they look like unimportant minutia.
Incorrectly Structuring the Purchase
Just because you're buying a commercial building doesn't mean that you should act as a building owner. You might be able to find more advantageous financing if you create a holding company to own the building and instead, become a tenant and rent from your holding company. If your business is small and closely-held, the best financing may be available to you personally, instead of to your business. Mortgages can be structured many different ways, and failing to find the best structure to achieve your big-picture goals can be a very expensive mistake.
Using Your "Go-To" Lender
The lender that your business goes to for most of its needs might not be the best source for a corporate real estate mortgage. General business lending is a very different industry than lending on commercial real estate. In many cases, real estate purchases can be financed through different avenues, like life insurance companies or Wall Street conduit debt, that are otherwise unavailable to businesses. While it's always a good idea to get a bid from your existing banking relationship, being open to an alternative could get you superior terms and a lower interest rate.
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