Loaning on a Commercial Building

Commercial Real Estate Investing
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Loaning on a Commercial Building

Dan P.
Investor & Private Money Lender · Fort Collins, CO · Member since 2014 · 26 posts · 2 votes

I have a situation where I will be providing the funds for an organization to purchase a commercial building in Loveland, CO. I will loan them the money for 3 years and then they will refinance. I have done deals structured similarly for residential properties (filed a Deed of Trust at closing to secure). Are there differences when dealing with a commercial property? Do we still file a Deed of Trust or is there a different instrument that is used? What other things do we need to watch out for on this?

Also, the borrower will be renovating the building - I need assurance that they have access to enough money to complete the renovations to make the property usable for their purpose (of course they are mutually interested in this being the case). How do we allow for enough due diligence to limit the potential of a giant "whoopsie-daisy" when it comes to renovation costs (or project delays due to zoning, permitting, etc) without making the seller reject our offer? Are there some customs here? We know the building needs work, but want to make sure we are confident of coming in close to the renovation budget and not twice the cost. The borrower is using an agent so we will have experienced representation, but looking for advice from others who have been successful here. 

Thanks!! Dan

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    9y

    @Dan P.

    I cannot speak specifically to Colorado, but there is no difference here when lending on multi-unit residential or other commercial (retail, office, etc) - register your first or second position against title.    If parts of the property will be let out, you may have an easier time securing an assignment of rents where commercial leases are involved.

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  • Dan P.
    OP
    Investor & Private Money Lender · Fort Collins, CO · Member since 2014 · 26 posts · 2 votes
    9y

    Thanks for the response Roy!!

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Dan P. so real estate is real estate is real estate. Security and notes and deeds of trust are the same for all real estate no mater what sits on it. 

    As for renovation costs, you probably need to have someone who understands commercial construction look over the scope and budget for the renovations. It probably wouldn't hurt to have someone check the people checking the scope either.

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  • Paul Sofia
    Lender · Charlotte, NC · Member since 2016 · 372 posts · 172 votes
    9y

    What Bill said

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  • Dan P.
    OP
    Investor & Private Money Lender · Fort Collins, CO · Member since 2014 · 26 posts · 2 votes
    9y

    Thanks Bill & Paul! I figured it was the same for commercial as residential, but wanted to make sure. I really appreciate the feedback/advice on the renovations. The biggest concern regarding renovations is determining the price of renovations to make it functional. We want to get it under contract, but to have the ability to back out if our quotes come in significantly more than what the initial ball parks are at. 

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  • Julie Fishman
    Lender · Santa Barbara, CA · Member since 2016 · 18 posts · 10 votes
    9y

    For commercial transactions it is standard to ask for personal financial statements and, when available, for operations statements, if those are not available then proforma or projected statements are used. It is typical to request 3-5 years of operating statements and last 3 months of personal statements. Your instinct is right that you need to be sure of their liquidity and other financial transactions that could interrupt your deal.

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  • Carl Olsen
    Investor · Conifer, CO · Member since 2016 · 14 posts · 7 votes
    9y

    Dan,

    Is the rehab cost being financed by the money you are lending? 

    If so, then I would get your own estimates of the rehab cost from a third party and hold that amount in reserve. As they complete the rehab ask for receipts then pay out the money. I have not done any commercial loans in the US but this is common practice in Australia. This does not guarantee no cost overruns but gives you some more control over the process and your money.

    I would also look at worst case and see if they fail to complete the rehab will the land value cover your loan amount. One of the hard money lenders I spoke to will only lend if this is the case on commercial deals.

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  • Dan P.
    OP
    Investor & Private Money Lender · Fort Collins, CO · Member since 2014 · 26 posts · 2 votes
    9y

    @Carl Olsen Thank you for the response! I appreciate your thoughts. I'm only providing the funds for acquisition so our loan amount should be covered by the building in a worst-case scenario. They have the money for the renovation, at least what the initial ball park bids are for. Assuming they can get in to the building for around that price, we should be set. My main concern is setting up the deal for success and as long the bids come in close, I think we are doing that. They are negotiating with the seller to allow a 45 day due diligence period that allows them to get a few contractors in to more thoroughly bid the building and give us the numbers we need to move forward. 

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