| commercial property Posted by: Carla Mar 7 2004, 10:34 AM We own a successful small used car business. We rent the lot and office for $2500.00 per month and would now like to purchase our own lot but real estate here is sky high and we’d have to pay between $500,000-1,000,000 for anything comperable. What are the options available to us in order to finance this. Our credit is great and we own our home with a small conventional mortgage. Our business is an LLC if that matters. Thanks. Posted by: loanuniverse Mar 7 2004, 12:26 PMCarla: Commercial loans usually have a 20% down payment requirement. This means that you would need to come up with $200,000 for a purchase of $1,000,000. If you can not come up with that kind of money there are other ways to make it happen and they involve someone keeping a second mortgage on the property. This someone could very well be the seller or what is sometimes called a mezzanine lender. The purchase of a lot would be made with a term-loan with a twenty or twenty-five year amortization, and a maturity of 5 to 10 years. If the maturity is longer than five years lenders usually put a “repricing event” at five years to make sure that they are not charging you 5% in five years if the market is 10%. Fees for this type of loan vary depending on the market and on the lender. They are usually about 1%, but could be higher or lower. In addition, there will be other expenses that could easily run $10,000 on a loan this size {appraisal, environmental, documentary stamps and attorney}. The source of repayment for this loan would be the cash flow from operations of the business. Analysts usually do the coverage in two different ways. The traditional way and the UCA cash flow way. I am only going to do it traditionally here, but I have a page around the website that shows how UCA is calculated if you want more information. You should know that traditional is the most important of the two since some lenders do not even know how to calculate UCA. To calculate your company’s traditional cash flow, you do the following {on an annual basis}: Start with Net Income Add interest expense Add depreciation Add amortization This results in Earnings before Interest Depreciation and Amortization In your case we add the $30,000 you spend in rent since this will be available to pay the loan as you will no longer be paying rent. This results in cash available for debt service This cash available for debt service should be enough to pay the new loan and any other loan that the company has with enough money to spare. Most lenders require a 1.20X debt service coverage ratio, which means that your cash available for debt service should be 1.2 times larger than your debt service. Hope this helps |
