Commercial Real Estate as Collateral.
Commercial Real Estate Articles November 8, 2003
Please understand that the point of view of these articles is that of the lender, not of an investor. Most of you are either investors or thinking of becoming investors in this field the value on this for you is to understand how your friendly banker is looking at the request.
The advantages to using Real Estate as Collateral:
1 There is a established demand for real estate. This is self explanatory as people are in need of shelter and businesses need a place to conduct operations.
2 There is a known supply of real estate and this can not be increased without being noticed in advance. This relates to the fact that properties can not be planned, developed and be ready for occupancy in a short amount of time. This is a big positive when compared to a manufacturer whose manufacturing process does not involve a large capital infusion. A competitor can show up within weeks if not days.
3 Revenues are usually contractual. This refers to leases. Once again the industry standard is different than that of others where companies can change suppliers from one week to the next. Usually, you can not do that with your landlord as you need to honor the commitment in the lease.
4 Long-term value appreciation. If you hear someone say "real estate is the safest investment because it never depreciates in value" do yourself a favor and run away. Real estate does go down in value. In fact, I would be very wary about getting into real estate right now as people are paying a historical premium based on the capitalization of the revenue. However, I will agree with the following statement: "If you can afford to hold on to the real estate investment during the bad times, your holding period is long enough, and you did not overpaid for the real estate investment then and only then I can assure you with a 99% degree of confidence that you will not lose your principal investment in the real estate". It is not as easy as the late night infomercials make it out to be.
5 Collateral can not be moved, it is easily identified and the bank can perfect the lien with a very strong lien that will withstand challenge. Remember when I told you that the point of view of the article was that of a lender. Well, this is the one advantage of real estate collateralized lending that most lenders love. Your borrower can not decide one day to take the real estate property and move it out of state. The collateral is easily identifiable not only by the street address, but by the more important legal address. Furthermore, the mortgage is a very strong lien, which is further reinforced by title insurance. You can see why real estate lending is dear to the heart of many bankers.
This is getting a bit long so I am going to split it into two parts, the second one will deal with the disadvantages of real estate as collateral.
click here for the second part.
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