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When it comes to commercial properties, cash flow is the name of the game. The value of commercial properties (multi-units apts. strip malls, office buildings, warehouses, etc.) is derived from the cash that it does, or will, generate. When you purchase a commercial property, you are actually buying an income stream.

If you are financing a commercial property, the Loan To Value that a lender will give you is directly proportional to income. Beyond that, the lender will look for how secure that income is. The rental/occupancy history and leases (particularly for office/retail/industrial) will help them determine that.

For instance, you'll get a much higher loan to value for a retail property with a long-term triple-net lease (ten years or more) occupied by a single-tenant with a very good S&P credit rating, than you will for a partially leased strip mall occupied by several "mom & pop" operations who each have leases of less than 5 years.

Just like residential, you can be creative with financing. However, the flexibility of that creativity will be determined by ---you guessed it---the current or potential cash flow.

The same applies to rehab projects. Obviously the income stream will be reduced or non-existent for the length of the rehab. How will you cover the payments? Lenders will want to know this. You'll have to be able to explain that AND have an exit strategy that makes sense.

There are several ways to be creative and reduce the lender's risk in the deal. Savvy investors/developers will know how to negotiate loans terms based on what they have to work with and seal the deal.

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Many investors fail to understand how to structure a deal financially. Keep in mind that any lender needs to minimize their risk in the deal. Whether it is a traditional loan or hard money, the lender has to have a reasonable expectation that the loan will be repaid--on time and in full.

All lenders make loans based upon the risk they are willing to expose themselves to. Credit, income (yours and/or the property itself) and the physical value of the property are the primary factors in residential lending. When you are talking about commercial properties, it is mainly the cash flow that determines the value of the property.

Another mistake most of us make is that we look for deals first and then try to find financing. We find what we THINK is a good deal, then later get turned down by a lender because the deal really doesn't make sense financially. We've done so much work up front, without really knowing what will actually have the best chance of being financed AND being truly
profitable.

That's a good path to frustration and relatively few deals getting done. If you are finding that most of your deals aren't working, that may be the case.

Try talking to your lender first. Understand your lender's requirements and then go out and find the deals that fit.

Always make sure that the numbers work and that you account for all contingencies when you are running your numbers.

You'll have much better success if you know upfront what deals your lender will finance and under what conditions.

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