Understanding the terminology used in the documentation for your commercial loan can help you to make the best possible decisions when making financial arrangements. Here is a quick and easy-to-use guide to some of the more obscure terms you may find in your loan contract.
Cap Rate
Also known as the capitalization rate, this figure is used to determine the current or prospective return on investment for a commercial property. Your lender will look at the cap rate to decide whether you can afford to make the monthly mortgage payments on a particular property and to evaluate its current market value.
Debt Service Coverage Ratio
Your company’s debt service coverage ratio is determined by dividing the annual net operating income of your business with the amount you must pay each year to meet principal and interest obligations on existing debt. Your lender will usually look at this figure to determine if you can take on additional debt in the form of a commercial loan.
EBITDA
Earnings before interest, tax, depreciation, and amortization, also known as EBITDA, is a simple evaluation of the performance of your company. It omits factors dependent on the real estate market and the stock market to provide you and your lender with a streamlined picture of your company’s potential for profitability.
Environmental Site Assessments
You may be asked to pay for and schedule environmental site assessments for the property you are considering. These fall into three distinct phases:
• Phase I site assessments are designed to provide a general overview of the ecosystems and environmental conditions of the property in question. They may require a visit by inspectors and a review of local records.
• Phase II of these assessments occur when issues have been identified that require further study. Inspectors may take samples of soil and water in the area to assess any contamination or potential problems.
• Phase III is the creation and implementation of remediation plans to prepare the property for use. This phase of the process can take months or years.
If an environmental site assessment is required for the property, you should be aware that the costs of remediation can far exceed the amount you will pay for the initial evaluation. Taking this into account can allow you to make an informed decision regarding the right investment for you.
Bridge Loans
Sometimes referred to as hard money loans, bridge loans are designed to provide short-term financing for real estate investors. As their names suggest, these commercial loan options are intended to bridge the gap until a property can be resold or until other financing options can be put into place.
These commercial loans often feature higher interest rates and require balloon payments within a short period of time.
Looking into alternative lending arrangements like those from ReProp Financial can often help you to find the most effective solutions for your commercial real estate financing needs. By working with a company that specializes in these types of transactions, you can enjoy the widest array of options and the highest returns on your financial investments.
