With the Residential Real Estate market beginning to pick up in some sections of the country, is the Commercial Real Estate Market coming back?
At this point, even though Residential Real Estate is coming back in some cities, the Commercial Real Estate sector still has to be considered in the doldrums as far as lending is concerned. The commercial vacancy rate is still very high in many areas of the country. Lenders are not excited to pursue this market as of yet. Another factor which makes them nervous is that lenders took huge losses in residential real estate. After the residential crash, many of the lenders that were lucky enough to escape the worst of the residential bust then endured major losses in the commercial sector.
What is real estate leaseback? Definition of a loan on property:
A Real Estate Leaseback is a loan against land. The owner of the property can be an individual or business. It is sold then leased back, allowing the owner to obtain working capital.
Compared to an equipment leaseback, it is also a better choice if the maximum capital is needed. This option will usually provide the most working capital. But be careful that you are not offering too many assets. Calculate the amount of the loan and the value of the asset to decide how much of your assets should be taken.
In this transaction, real estate is sold for cash, with a lump sum going to the seller. It is then leased back with a purchase option at the end of the term. The seller gets to stay on the property during the entire term of the transaction.
Borrowers have different goals with this transaction and most choose this option to get the most money back.
How to get a real estate leaseback. Steps, direction and tips.
Research companies that have commercial and residential leasebacks as their primary programs. Consider minimum funding amounts, rates, LTV loan to value requirements, and types that qualify. Also review total processing time from application to funding.
Minimum loan amounts are usually $100,000. Most programs are secure commercial property. Requirements often vary depending on the State’s real estate laws. Some programs may not be available in all states.
Above all, opt for the program that most fits your particular commercial or residential holding.
Contact funding programs and make sure your commercial or residential property meets funding program requirements.
Submit an application for funding. Include any documentation that increases your chances for approval, higher offer amounts and better terms. This can include a recent appraisal, tax returns and income property information such as rent rolls.
With any real estate leaseback offer or approval, review the term sheet provided that includes conditions and closing requirements. If satisfied, provide items required for closing and funding. Borrowers paying for an updated appraisal and other closing costs is standard. Complete the transaction and receive funding.
Frequently asked questions:
Question: What is a leaseback on Real Estate?
Answer: When you take real estate you own, sell it and lease it back. The real estate must have a lot of equity in it to get money out. At the end of the lease, you retain ownership.
Question: Can I payoff other loans?
Answer: Yes, you can payoff other loans. This will help your overall cash flow and make it easier to pay back the new loan.
Question: Why do a leaseback instead of a regular loan?
Answer: Leasing it back may give you more tax advantages than a regular loan and may be easier to get approved for.
Question: Is it a long process?
Answer: The process often takes two to four weeks. Closings can be faster when documentation is provided quickly.
Transaction Dollar Amounts
The minimum dollar amountis $100K with a maximum of $5,000,000. Since the average property size is $250K and up, the funded amount on a Leaseback using Real Estate will typically be $100K to $250K minimum, where as the average size loan on equipment is in the $50K range.
Loan to value, also known as LTV, will vary somewhat depending upon credit and the financial position of the seller. The maximum loan to value is usually 75%.
The property will contain a structure in addition to the land. The structure can be either a free standing commercial building, or affixed to part of a larger structure. A strip shopping center is an example. Other acceptable collateral types are apartment buildings, gas stations, convenience stores, office buildings, restaurants, and industrial plants. Whether the structure is included in the transaction is at the discretion of the lender. If the value of the structure is minimal, the lender may decide not to include it in the transaction.
Property values continue to increase in US markets. For many market locations, values have not recovered as dramatically but this form of financing is still viable for many borrowers.
If the potential borrower in a leaseback real estate has significant equity, the strong equity position insulates them from market fluctuations. This increases the prospects for approval for a significantly higher funding amount. Our representatives will discuss the details of your scenario with you. You will understand and proceed on the most viable and best form of financing based on your situation.
Why this Transaction?
This form of financing can be especially effective for businesses in need of significant funding amounts, without as many of the extensive requirements of traditional financing. Businesses in need of working capital will obtain a greater result by using their Real Estate for their business rather than simply owning it and terms will be significantly shorter than acquisition financing.
Terms are usually 5 – 10 years. This will allow the Seller to fully re-acquire ownership. At that point, they can retain full equity, or consider another round for additional working capital for their business.
Our experienced industry professionals, knowledgeable in both Real Estate and Equipment Leasebacks will quickly guide you through the process.
Leasebacks involving equipment or vehicles bring in revenue into the business. However, using real estate will bring in the most capital into the business by far. The borrower can expect an environmental survey to be required. The cost of the survey will normally be $500 to $1,000.
This financing can bring in millions of dollars versus an equipment only transaction. Equipment is less desirable and brings in much lower offers. Corporations that have over $10,000,000 in sales per year or higher should first review their asset holdings to determine which financing type would be better suited for their needs.
Use Real Property as security to get a real approval and the most money for your business.
Can a business get a Commercial Real Estate Leaseback in this market with current real estate values? Yes, Commercial Real Estate Leasebacks are happening. Full appraisals, additional scrutiny of cash flows through the review of 2 to 3 years of tax returns, bank statements, rent rolls if not owner occupied, and lower LTV’s, and more may well be required in the current environment. The lower LTV on a commercial real estate leaseback is a big issue.
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The lender wants to protect themselves in a sinking market by lowering the LTV’s. Instead of 60%, 70%, or 80% LTV’s, 40% – 60% LTV’s may be in order. After a sound cash flow situation of the borrower is verified, the lower loan to value will primarily protect the lender in this environment. This is to be expected to continue throughout 2011 and 2012.
After the full appraisal is completed, if the value is sufficient and credit is acceptable, the lender will do an environmental survey. Upon passing the survey, the lender is ready to proceed with a Commercial Real Estate Leaseback.
Commercial Real Estate Leaseback Resources:
Realtor.org – Provides important sales and statistical real estate information