John Crefin - Introduction to Commercial Real Estate Loans: The Easy to Understand Basics

Copyright 2018 by Crefin, LLC

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ISBN 978-1-54393-882-1 eBook 978-1-54393-883-8

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This book is designed to provide information on the subject of commercial real estate loans. While the information described in this book is based on experiences, it is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, financial, or other professional services or advice by publishing this book. As every situation is unique and different, questions and specifics to each situation should be addressed to an appropriate professional. The author and publisher specifically disclaim any liability, loss, or risk that is incurred as a result, directly or indirectly, of the use of any contents of this book.

Now that we have that out of the way, lets move forward!

This book is dedicated to my wife and family. Thank you for the inspiration and encouragement to put my knowledge to paper. Thank you, God, for the guidance, patience, and perseverancewithout You, nothing is possible.

Also, though not personally known, thank you to Timothy Ferriss and John C. Maxwell for their inspiring books.

Preface

Before We Begin

I am often asked about commercial real estate (CRE) loans or, more accurately, how they work. I often hear:

• Do I qualify? What do I qualify for?
• Do you think I can get a loan for [fill in the blank]?
• What would the rate be?
• What are the fees?
• What are the terms?
• Is it a good deal?

These are all good and common questions that are frequently asked. Commercial and residential real estate brokers ask, residential loan officers ask, business owners ask, investors ask, developers, attorneys, accountants, you name it, the list goes on and on. Some are pretty green (rookies with no experience) to the industry and some are seasoned (veterans with experience). But how does it all work? Or more particularly, what does a bank look at? It seems to be unknown territory to most, and I guess to a certain extent it is. But it doesnt have to be. Sure, it takes years and years (and years) to be really good at commercial real estate finance even decades. But what about the basics?

Before we start, lets be clear, commercial real estate finance is NOT residential real estate financethere is a big difference. The problem with understanding CRE finance is that you either have to be thrown into the lions den with experience (and hopefully a good mentor) or get your schooling (at least for a basic understanding). The problem with the former is that you dont have the time, opportunity, or desire to dive in to expert status. The problem with the latter is that you spend weeks and weeks (or semesters or years) and countless hours going through technical classes (with projects, homework, and various exercises) with much of the material going unused (that is, most dont want to know every detail and all the minutia). Even worse, you spend thousands, literally thousands, of dollars going through this schooling only to retain or wanting to retain the basics.

So what does this book do? This book provides you with a foundation and the basic knowledge of commercial real estate (CRE) finance (i.e., loans). These basics are the core to CRE financing. These basics will give you an understanding of this industry, and when you are finished reading you will feel that you have this core knowledge. You will look back, and, one can bet, you will have retained the bulk of it. No need to spend years on it. No need to spend thousands. This book will give you the meat (okay, and some side dishes) of CRE finance. It will give you the foundation you are looking for whether you are a real estate broker, lender, investor, business owner, student, or just plain curious. It will give you examples throughout, and as a bonus it will give you a supplement of questions to ask your banker.

Note to readers:

You wont get a lot of fluff to fill the pages of this book, its actually a pretty thin book if you ask me, which is the point. We are not in it for the hundreds and hundreds (or thousands) of pages. No, we are in it for a quick, easy read packed with content of the basics.

Introduction

If you havent already, please read the Preface. Once you have, go ahead and continue (and thank you by the way).

This book will walk you through some of the basics of commercial real estate (CRE) first, and then it will dive into CRE finance. It will walk you through a typical loan structure, the primary drivers of financing, what to expect throughout the loan process, and then on to some other common loan types. It contains examples and endnotes throughout, as well as what I have found to be Industry Standards. In case you miss any terminology in the endnotes, or simply forget an acronym, the Index/Reference section can be found in Section IV Index/Reference, which will refer you to the page to find the subject matter again. There is also a Supplement you will find useful: a financing questionnaire (questions to ask your lender) at the end of this book. This supplement is a great start to begin the CRE loan process.

Note: The bulk of this book discusses CRE finance when dealing with a typical bank CRE loan, and although things vary from bank to bank, these are pretty normal standards on what a lot of banks do. In addition, alternative lenders will undoubtedly be different; however, the basic requirements for them should be more or less the same as you read in this book.

Another note: Pay attention to the endnotes throughout for extra nuggets of information.

I

Commercial Real
Estate Overview

Prior to jumping into the actual financing of commercial real estate (CRE), we should cover some of the basics of commercial real estate itself. Go ahead and read through this section since the CRE finance section will build off of this section. At the very least, it will be a good refresher for those of you who are already familiar with CRE in general.

Property Types

So, what is commercial real estate ( CRE . So now that we know what CRE isnt , what then, is considered CRE? The basic CRE property types are as follows:

• Office
• Retail
• Industrial
• Multifamily
• Other (including mixed use , etc.)
• Land (primarily for commercial use)

Office

Office properties are just what they seem to be. They are occupied by a business that uses the property for their office, and they typically include service industries. Some examples include: your local real estate office, your friendly insurance agent down the street, your CPA, a call center, a start-up tech company, etc.you get the idea.

Retail

Retail properties are also pretty straightforward and are what they seem to be. They are occupied by a business that uses the property to sell products or services typically to the public. Some examples include: a supermarket, an electronics store, a clothing store, or a fast-food restaurant.

Industrial

Industrial properties . Some examples include: a mattress manufacturer, an auto manufacturer, a plumbing supply store, a lumber warehouse, or any building that manufactures or stores products or goods.