Commercial real estate options

Northern Nevada's strong commercial real estate market is expected to remain healthy, which means opportunities for qualified borrowers.

There are several real estate lending options available, from production home building to office building to multi-family unit construction.

It helps to know what these options entail and what you will need to apply.

Types of financing Production home builder financing: This financing is for medium to large homebuilders constructing a minimum of 50 homes per year.

The first step is to locate a housing site, then apply for the funds to prepare the area for construction as well as a line of credit to build the actual homes.

The first loan is referred to as an acquisition and development loan.

It pays for the streets, curbs and land improvements.

The line of credit pays for the home construction.When a homeowner buys a house and closes escrow, the line of credit is repaid.

Rates for these loans are tied to the prime rate, usually one half to two percent over prime.

This type of lending was very active in 2002 and every indication suggests we have a good housing market well into 2003 because land to build on is becoming harder to find and more expensive to develop.

In other words, demand should exceed supply.

Construction and mini-perm financing: This type of financing is primarily for commercial office buildings developed by investors or owner-occupants.

In order for most banks to consider financing office buildings, the project's rentable space should be about 50 percent pre-leased.

The pre-leased space allows the developer to lower the risk associated with leasing an entire project upon completion.

The duration of these construction loans offer time to build and lease out the project.

At that point, the loan then converts to a miniperm loan, (referring to its short maturity).

The borrower may then choose to refinance for a longer term.

Most of the construction and miniperm financing in northern Nevada is with local companies who occupy the offices they build.

This business has been active and we expect it to continue to grow especially with the current low interest rates.

It is important to note that construction loan rates are also tied to the prime rate.

Fixed rate, mini perm,multi-family unit financing: The loan term to finance multi-family unit projects (or apartments) is very similar to the construction and mini perm loans made for commercial developments (as mentioned above).

These projects are often built in phases and the timing depends on how quickly the apartments are expected to be leased.

Land costs per apartment play a critical role.

Successful projects, when complete, will generate income after all expenses of about 1.25 times the payments on the bank mortgage.

As northern Nevada continues to grow, apartment complexes are in demand, making it a strong and steady market.

Loan mechanics Applying for a commercial loan is an in-depth process, mostly because the loan size tends to be considerable.

Applicants should have information on their property, including cost breakdown on construction, projected income on the project and the local market conditions.

Additionally, since most commercial real estate loans require personal guarantees, an individual borrower's financial statements are also necessary.

Most real estate loans will require an appraisal and possibly an environmental study.

Property, liability and title insurance is also required.

With so many elements, plan a six- to eight-week turnaround time to complete a loan.

It is a thorough process I recommend carefully choosing an experienced banker and real estate specialist to assist you.

Here are some pre-application hints that may help you complete this process: A demonstrated record of accomplishment.

Typical commercial loans are highdollar loans.

At that level, lenders feel more confident working with borrowers who have successful records of accomplishment.

Be prepared to invest your own money.

In a typical commercial real estate loan, approximately 15 to 20 percent of a project's total cost will come from the borrower's own pocket.

In addition, a borrower should have sufficient resources outside the development to cover possible delays in the project's timeline.

The project needs to make sense in the marketplace.

Part of the loan process involves a close examination of the business model and how it fits within the marketplace.

For example, a business model describing homes with characteristics unusual to the neighborhood will be challenging to fund.

Keep in mind not all loans will be approved.

Bankers work hard to structure loans that will work for the customer and the bank.We try to finance as many projects as possible, however occasionally the risks are too high.

Helping our customers make the right financial decisions is more important than simply making a loan.

Mal Ercanbrack is the Senior Vice President and Manager ofWells Fargo Commercial Real Estate Group in Nevada.

Based in Reno, he leads a team of bankers and support personnel that work to provide construction financing to developers and real estate investors.