An Overview of the 3 C’s of Commercial Real Estate

Having a clear understanding of what is necessary to qualify for a commercial loan is crucial if you want to be successful. While you may think the requirements should be similar to a personal home loan, there are different variables when it comes to commercial loans. Lenders look at these variables to determine if they should loan money. There are three factors that virtually all lenders consider: these are called the three C’s of commercial real estate.

1. Property Loan Collateral

The first “C” when it comes to commercial loans is collateral. Collateral is defined as something that is used as security for the repayment of a loan. In the case of a commercial loan, the property itself is used as collateral. For example, if you’re requesting a loan for a new building to house your upstart company, the building itself will be used as collateral. If your company is unsuccessful, the building will be forfeited and belong to the lender. An extensive appraisal of the property will be conducted in order to assess collateral. The appraiser will look at how old the property is, assess similar properties and judge the overall condition of the property. In a commercial mortgage, there are also additional assets that can be used for collateral such as account receivables and contracts.

2. Property Cash Flow

If you’re requesting a commercial real estate loan, one of the most important factors determining approval is cash flow. The underwriter for the loan will look at the history of the property to see the amount of income generated. There is a certain ratio that is used to determine if the annual net income of the property will cover the amount of the loan.

3. Borrower Credit

The credit of the borrower or guarantor will also be used to determine loan eligibility. If there is a corporation or other entity as the borrower, the credit score of that entity will be used. Each lender will have different credit requirements; however, there are general standards including no bankruptcy within seven years and no foreclosure within three years. A minimum credit score of around 660 is also a factor.

Collateral, cash flow and credit are three important factors in a commercial real estate loan. Though the three C’s are used to determine commercial loan eligibility, meeting these requirements doesn’t mean you will automatically be approved. However, not meeting one of these factors will likely hinder your ability to secure a loan.

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