Whether you’re looking to purchase a commercial office space for your own business needs or as an investment, the initial process of securing funding may seem a daunting task at first. That being said, it truly doesn’t have to feel that way. Just as in residential real estate, there are a plethora of viable financing options available to buyers in the commercial real estate market. You just have to know where to look and a bit about each of them in order to determine what the best route is for your personal circumstances. Let’s take a look at some of the more common ways to finance your commercial office space purchase.
Borrow the Money
If you’re lacking the start-up funds for your commercial office space investment, the most obvious first place to look is to your friends and family. Already having an established rapport with these people helps to eliminate a whole lot of the red tape that is associated with borrowing from a more traditional lender. On top of that, your friends and family are much more likely to offer you a loan under reasonable terms that won’t leave you scraping to get by each month. Choosing to go this route, however, has its downfalls as well. Failure to have a concrete repayment plan that is outlined in a notarized, legal and binding contract could lead to big communication issues later down the line. The bottom line is to treat this type of a loan with the same respect and diligence that you would a bank loan.
Crowdfunding has exploded in popularity over the past decade as another viable way to purchase commercial office space (and other types of commercial property) as an investment. This inventive mode of financing has opened the commercial investment market to a much broader range of individuals. It is important to note, however, that this method will probably not be as useful if your intention is to purchase a property for your own personal use. The idea behind crowdfunding is that multiple investors are able to put down smaller chunks of money, the total of which can then be used to purchase a commercial project that each investor can eventually benefit from as it begins to make a profit. There are two main types of investments with crowdfunding, equity and debt investments. Make sure that you do the necessary research to decide which option is best for you prior to jumping in.
If you prefer to go the more traditional route when it comes to financing your commercial office space purchase, there are a lot of options here to consider as well. Let’s take a look at a few of the more prominent types of loans you may come across.
- SBA 7 (a) Loan: These types of loans, backed by the U.S. Small Business Administration, are geared towards businesses that have been around for at least two years, but may be unable to secure financing through a bank. They will typically lend up to $5 million and require that the owner intends to occupy at least 51% of the building in question. The buyer is traditionally expected to come up with between 10-15% of the purchase price as a down payment, and loans are offered at interest rates between 5-8.75% for terms of 10-25 years.
- CDC/SBA 504 Loan: This particular type of loan is similar to the previous in that it is suitable for established businesses and will require the borrower to occupy at least 51% of the property. However, there is no cap on the amount a borrower can take. Lenders will typically loan up to 90% of the building purchase price and require a minimum of 10% down. Loans are offered at lower interest rates of between 3.5-5% for terms of up to 20 years.
- Traditional Commercial Mortgage: A borrower here can expect to receive between 65-85% of the property’s LTV ratio, but a significantly higher credit score is expected to qualify. A 15-35% down payment is expected and interest rates are offered between 4.75-6.75% for terms of 5-20 years.
- Commercial Bridge Loan: This is a short-term loan option (between 6-36 months) offered at up to 80-90% of the LTV ratio on your commercial office space. Down payments of 10-20% can be expected with interest rates between 6.5-9%.
- Commercial Hard Money Loan: Lastly, this type of loan is ideal for business owners with poor credit who are looking for a short-term (1-3 years) loan that can be used towards the purchase of, or renovations on a building. Loans are offered at interest rates between 8-13%.
Looking for the Perfect Commercial Office Space in Tampa Bay or the Surrounding Areas?
Now that you have a better idea of how to make your commercial purchase a reality, it’s time to start searching for the perfect space that suits your needs. John Milsaps has devoted the past decade to helping his clients do just that, and he’s eager to make you his next satisfied client. Contact him today!