The search for commercial real estate financing is at times a complicated and overwhelming process that can leave us with many unanswered questions. Sometimes it’s hard to ask these questions. It’s easy to be intimidated in this business, so we created this brief guide to help answer your concerns and help you move forward confidently, and successfully, in your search for commercial real estate financing.
How long does the crowdfunding process take?
Depending on the platform you select, funding can take anywhere from 15-30 days. You can expedite this process by having all the financing documentation for your project ready before applying. Prepare by carefully reading through all the terms of the programs you’re considering. Knowing the terms and expectations of your lender will also lessen processing times. Put extra care into the preparation of your application to avoid any errors or omissions that could raise red flags. If your funding partner has a streamlined underwriting process, this can also greatly reduce the time to funding.
How long is the closing period for crowdfunded loans?
The closing period for commercial real estate financing can vary greatly. Each funding platform has a unique process and background data requirements. For more complex deals it is critical to have all application and documentation prepared properly. Closing can occur in as little as 5-7 days, if everything is in place and the project meets all the underwriting requirements. That’s faster than any conventional means of obtaining commercial real estate financing.
What are the risks in financing a project with crowdfunding?
Like any financing, the most common risk is that of default. If for some reason your organization is unable to meet its debt service requirements, the debt holder has the right to foreclose on the property. You can avoid this through conscientious budgeting and working with finance professionals to help monitor and control expenses. Also, don’t seek financing that you know you may not be able to repay (a form of fraud). Fraud by fund managers is another concern, but as long as you’re working with a reputable funding platform, there is little risk of involvement in fraudulent transactions.
Is commercial real estate financing available in any market?
Each platform with have different preferences for the types of projects they will be willing to invest in. This most important criteria is risk. Commercial real estate financing is inherently risky, especially for the lender. To mitigate this risk, lenders generally choose to invest in markets that have strong appreciation and lease rates. They will also consider other market factors including industry growth, labor supply and demand, and population growth. Markets that exhibit strong growth in these areas will typically be given preference; however, even if your deal is in a rural area, but has tremendous potential, don’t be afraid to pitch it.
How much does crowdfunding typically cost?
Fees vary by lender and by the risk associated with your project. This is affected by factors such as occupancy, credit score, and borrower experience. It also varies by the type of project for which you’re seeking funding. In general, fees vary between 8 to 14% for debt financing and 10-20% for equity financing, in addition to origination fees ranging from 1-5%. You can get the best deal by properly preparing for the financing process and by working with a lender that specializes in the type of project you’re proposing.
What property classes is crowdfunding available for?
Financing is available for almost all property types; however, commercial real estate financing costs vary with risk. Underwriters have different criteria and return expectations depending on whether the project is commercial, single-family, multi-family, or mixed use. Lease demand and occupancy is an important consideration in this regard. Each geographic area will have varying levels of demand for specific property classes. While commercial properties may be a dominant demand factor in one market, multi-families may be the economic driver in another. A related issue is occupancy. Properties with less units will typically require a lower vacancy rate to obtain the lowest rates. Conversely, multi-family and commercial properties have higher tolerances for vacancies due to scale.
What loan purposes can I use crowdfunding for?
Here’s the good news: you can use crowdfunding to obtain commercial real estate financing for cash out loans, partnership buyouts, bridge to construction, bridge to bank, rehabilitation, stabilization, and even ground up construction. The availability of financing for each purpose will vary with property class and the financial strength of the borrower. The flexibility of crowdfunding in meeting the financing needs of your diverse projects is one of the most appealing benefits of this financial model. Whereas conventional lending sources have many conservative, and often bureaucratic, underwriting requirements and limitations, crowdfunding platforms can act much more dynamically to meet the unique needs of your development business.
This list of questions is by no means exhaustive. Please feel free to ask us any questions that come to mind as you research and evaluate your commercial real estate financing options. Obtaining financing is often a complicated venture, but with the help of committed, passionate, and friendly real estate lending professionals, your funding experience can be much more positive and lower risk.