You’ve found commercial real estate and are ready to secure funding to either rent or buy the property and build it out to your specifications. Now what? Asking for money can be overwhelming and there are so many different types of loans out there, how do you know which one is right for you? We are here to help answer some of the common questions that arise before you receive funding for a project.
What kind of funding am I eligible for?
If you are starting a business and plan to rent your space, you can get a business loan if you qualify. First you will need a business plan. The business plan should explain what you’re going to do and how you’re going to become profitable.
“If you have experience in an industry, you should outline that experience,” says David Kircher, President, Owner, Phoenix Financial Advisors, LLC. “For example, did you manage the financials prior in your old role? Were you the buyer? Were you responsible for the profit/loss? That all makes a difference.”
This breakdown of how you will become profitable is often referred to as pro forma. Some banks have a format that you can fill out and sba.gov has business planning tools and pro forma tools to use as well.
In addition to the business plan, you will most likely need some equity-like real estate, an investment brokerage account, CD, etc.
If you plan to purchase the real-estate vs. rent, you will have the option for a mortgage loan that includes the purchase and the build-out or you might take out a mortgage and then a separate business loan that covers the tenant improvements. If you are planning to own and operate a business that occupies the space that is a business loan, but if you plan only to be a landlord that is an entirely different kind of loan.
Funding for tenant improvements will depend first on the lease, if you haven’t already, you should check out our next blog post on what you need to know when signing a lease. The lease will outline whether the tenant or the landlord pays for improvements to the space.
Let’s say the landlord is responsible for major improvements like plumbing, HVAC or other issues but you (as the tenant) would like to make improvements above and beyond that, you would need to pay cash. This means you are supplying the funds, whether from a loan or personal line of credit from a bank.
SBA loans are also useful, as they do not require any collateral. They are small-business loans partially guaranteed by the U.S. Small Business Administration and issued by certain banks. SBA loans have stringent rules and standards, but they have flexible terms and low interest rates.
How much funding will I receive?
How much funding you get really depends on what you need. You might have existing cash to cover soft costs, working capital to cover wages, and if you have a building with equity, you may be able to use that as well.
“I recommend you make a wish list,” says Kircher. “Throw everything on there that you think you will need and if you don’t know costs find out what they are, so we have a reasonable target to start with to know what it’s going to cost.”
Based on this list and your existing assets, investors, or equity, you may receive funding from multiple different loans. There are also programs to help business owners, such as state programs that will give seed money, or Kiva which are microloans.
“Collateral means a lot but more importantly is the cash flow of the business operation,” says Kircher. “Is the client able to make their payments?”
How much do I need to put down?
At a minimum, you will need to put down 10%. This may be cash or perhaps based on existing equity. Let’s say you have a $500,000 building and you have an existing $250,000 loan and you now need $100,000 for expansion – now your loan becomes $350,000 against the $500,000 building and you have plenty of equity so you may be offered 100% of the funds because you have equity and proof of cash flow.
What happens if I go over budget because of the construction portion of the project (supply chain, labor, etc.), how do I secure additional funding?
“The percentage of projects that come within budget is less than 10%,” says Kircher. “90% of projects go over budget.”
So, with this in mind, it’s important to plan ahead. Estimate that you will probably run 20% over budget. If you don’t receive enough funding to cover that additional cost, you may look to alternate sources of funding. There are sometimes funds available from a municipality that has a reserve. Again, you can look to the state or perhaps investigate microloans at this point.
“I will work with banks, municipalities, the Wisconsin Economic Development Corporation (WEDC), the State of WI, and local chambers of commerce to get microloans to help,” says Kircher. “We call this gap lending, filling the gaps on what we need without draining the client’s cash.”
What are the next steps?
The lending process can be overwhelming, but knowing what kind of loans are available, how much funding you may be approved for, and having an adequate down payment will help you get through the process smoothly. It’s also helpful to have a consultant, lawyer, or accountant to help you navigate the process and help you find a lender.
“I once went to 33 banks before finding one that said yes,” says Kircher. “There are always other bankers. Some bankers may be at capacity at their loan portfolio, or they have had some bad experiences in the past and need to step back.”
Once you have received funding, it’s time to begin the project. At this point, you may be ready to sign a lease and you’re probably asking yourself what you need to know before doing so. Read our next blog to dive deeper into this topic.