The business that owns and occupies its building may want to consider creating a long-term benefit via financing with a fixed-rate mortgage loan that has a term of 10 to 20 years. The advantage to the business owner of such long-term financing is the elimination of interest rate fluctuations from the variables impacting the profitability of the business.
Just as fixing an interest rate on a long-term loan during a period of high interest rates could have negative implications as interest rates decline, fixing an interest rate during a period of low rates can have positive implications as rates increase. The current historically low interest rates present everyone with a real estate mortgage loan a unique opportunity to reap the benefits of today's interest rate environment for many years to come.
Banks typically fund loans with short-term deposits, such as checking accounts, often with a fixed interest rate on the loans for a maximum of five years. While this option may appeal to many businesses, with the current low interest rates, longer-term loans may be a better option.
Recently, many businesses and their owners have partnered with life insurance companies that specialize in long-term lending. Because life insurance companies are investing for the long term with the premiums received from policyholders, they can make loans at a fixed rate for longer terms of 10 to 20 years.
Life insurance companies lend to owners of a wide range of commercial real estate, including office buildings, shopping centers, apartment buildings and warehouses. Furthermore, the lending is not confined to large high-rise offices or regional shopping malls but rather encompasses a variety of property types including manufactured home communities, hotels/motels, and owner-occupied office and warehouse buildings. It is the availability of financing for this latter property type that provides an excellent opportunity for business and their owners to benefit from the current low interest rate environment.
Life insurance companies offer a variety of loan terms that can be tailored to meet the specific requirements of the borrower. Loan maturities range from 10 to 20 years, all with fixed interest rates, and loan amortization will range from 10 to 25 years.
The borrower, which would be the building owner, can be any of a number of entities, including the business owner or owners personally, or a partnership or limited liability company which is held by the business owner or owners.
A typical loan structure would provide that the business sign a lease for the building that is the same length as the maturity of the loan. Therefore, a loan with a maturity of 10 years would require the business/tenant to execute a lease with a minimum maturity of 10 years. Whether the borrower/business owner will be liable for the repayment of the loan is a function of the financial capacity of the business.
The greater the financial strength of the business that is serving as building tenant, the less the recourse, if any, the lender will require from the borrower.
The process to obtain a long-term, fixed-rate mortgage is similar to that of obtaining a bank loan. Life insurance companies that provide these loans typically have correspondent relationships with local commercial mortgage banking firms.
The mortgage banker works with both the borrower and the lender to underwrite the loan, obtain the necessary third-party reports, such as an appraisal and environmental study, and coordinate the closing process.
The entire process, though similar to that required by a bank, is somewhat more detailed and comprehensive, due in large part to the long-term commitment by both the borrower and the lender. Typically about eight to 10 weeks are required from the first meeting between borrower and mortgage banker until the loan is closed and funded.
Long-term financing for commercial real estate can be an appealing option for many businesses to secure efficient, cost-effective financing. Borrowers and their advisers should work together to determine the most appropriate answer to their financing needs. Mark Ransom is vice president and manager, Fifth Third Bank Real Estate Capital Markets. Reach him at (614) 744-5929 or firstname.lastname@example.org.