Thanks to his friends, landscape contractor Ron DiPietro was well aware of a common real estate loan pitfall that ensnares many unsuspecting entrepreneurs: Seduced by a low interest rate, some companies end up with a short-term commercial mortgage rather than the extended-term, fixed-rate loan they often need over the long run. Having seen friends--and fellow entrepreneurs--experience this problem, DiPietro was determined to not make the same mistake when it came his turn to seek financing for his company, Landscape East & West in Portland, Oregon.
Resolving to think about the big picture and his long-term needs, DiPietro solicited loan offers from a handful of lenders before choosing a $1.5 million, 15-year fixed commercial mortgage from Bank of the West. Says DiPietro, 50, "It gives me peace of mind to know what the payments are going to be over the life of the loan and that I will not have to deal with any fees for refinancing unless I choose [to do so]."
When it comes to commercial real estate borrowing, you can sidestep many potential problems by resisting the urge to make a beeline for your usual lender. Instead, review loan terms from several financial institutions, focusing your search on lenders that specialize in the type of property you're looking to buy. You're likely to find a better financing package from a lender with extensive knowledge of your industry and the property needs that go along with it.
When comparing lenders, be sure to watch out for recall provisions that allow the lender to "call" the loan annually based on changes in your financial circumstances, even if your loan payment history is spotless, warns business financing consultant Stephen Bush. "A commercial borrower [could] be faced with having to refinance their loan at a very inopportune time," he says.
If the process of finding the right lender seems daunting, one option is to let a commercial mortgage broker do the work for you. "A lot of times, lenders only have [a few] loan programs you can fit into," says real estate investment specialist Bill Twyford. "When you go to a mortgage broker, the mortgage broker might have 10 lenders it works with, and each one of those lenders may have five or six [suitable loan programs]. So now you have 50 or 60 [options] that could work."
But the services of a commercial mortgage broker come at a price. They receive a commission based on a percentage of the total amount borrowed, which can range from 1 percent to 4 percent for larger loans and run as high as 6 percent for smaller loans, says Bush.
Once you've picked a lender, hire a commercial real estate attorney who has experience negotiating the type of loan you're seeking. "But don't expect to spend a lot of time negotiating the boilerplate of the lender's documents," says attorney Anne DeVoe Lawler of Jameson Babbitt Stites & Lombard PLLC. "Focus on the business terms, and focus on the big issues in the document that may affect you."
While you may be able to persuade the lender to reduce some of the transaction fees, don't make your borrowing decision based on price alone. "The interest rate is rarely the most important factor for the business loan," Bush stresses. "That doesn't mean [you should] ignore it, but a business owner who over-emphasizes the interest rate [will] almost always make multiple mistakes."
Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.