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What would your lender do?

Seeing your commercial property purchase in the eyes of your lender helps you make smart choices

Michael Dolan
Guest Columnist
It feels great to own the building where your company does business.

Business owners who own their building have two sources of wealth generation: their business and their commercial property.

Land ownership often means the real estate has a large positive impact on the return of the business. Declining loan balances and advancing property values mean that entrepreneurs build equity. Unlike their competitors without real estate holdings, they can borrow against the equity in their property to fund new initiatives, expansion and the acquisition of additional properties or businesses, all without diluting their ownership.

It feels great to own the building where your company does business.

Business owners who own their building have two sources of wealth generation: their business and their commercial property.

Land ownership often means the real estate has a large positive impact on the return of the business. Declining loan balances and advancing property values mean that entrepreneurs build equity. Unlike their competitors without real estate holdings, they can borrow against the equity in their property to fund new initiatives, expansion and the acquisition of additional properties or businesses, all without diluting their ownership.

Yet it is frequently at the time of seeking a loan that the owner discovers this wonderful feeling comes with a price. Commercial lenders see things differently. That’s because they must protect themselves against the risk that the loan may run into trouble and not pay off through cash flow from the business, but rather through the outright sale of the property. What this means is that while you may have $500,000 of equity in a property, lenders cannot lend against the full value of the equity.

Since the lender considers a worst-case scenario, the question becomes, how does a real estate lender view your commercial building? Knowing the lender’s perspective in property valuation helps you understand the thinking behind your lender’s terms and perhaps provides some purchase points for negotiation. It’s good to be familiar with those points before you approach your lender.

First, let’s look at comparable sales and elements of comparison. Just like a buyer, the lender looks at sales of comparable properties in the surrounding area. There are elements of location that add value and there are elements that subtract value.

A central business district location is better than one in a remote area. A corner location is often more desirable because it generally gets twice the traffic than a locale adjacent to two other buildings. A building on a one-way street will see less traffic than one that is not.

A second element of comparison is land in relation to the building. A building that covers most of its land area with little or no parking would not compare favorably to a building that had more parking, or a loading dock, or room to expand. While some businesses would not need these amenities – such as a small manufacturer, or a repair shop – in the lender’s eye, diminished land area limits the number of would–be buyers in a liquidation scenario. The result is reduced value.

A third important element of comparison is the overall building size. Again, this is a relative comparison to the property type. If your building houses your auto repair shop with three bays, while most other independent repair shops have between four and six bays, your property would be considered small, which would have an impact on its value in the eyes of the lender. By the same token, buildings that are large by comparison pose challenges too. A building used for dry cleaning that is three times the size of a typical dry cleaner would be viewed by a lender as less desirable than one that was typical size.

For borrowers who own single purpose commercial properties, the lender’s approaches toward property valuation can prove frustrating. The dedicated purpose of the building does not add value, but rather shrinks it, because there is a smaller pool of buyers, which in turn increases the time that may be required to market the property.

To increase your chances of getting that loan approval, look at your building not through your eyes but through the eyes of a lender. They will be worrying about trying to sell your building in the future. You’ll be one step ahead if you learn about the characteristics they will look for in order to make their decision.

Mike Dolan is a commercial and residential mortgage broker with Choice Equities in Vancouver. He can be reached at 360-883-3335 ext. 843 or at mike@choiceequitiesinc.com.

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