Many sectors of the real estate market continue to remain strong and attract significant attention in the financing markets. Notwithstanding the recent slow down in the housing market, demand for and the valuation and financing of commercial real estate continues at a strong level. If you are acquiring or refinancing real estate, keep in mind the following five key components:
1. Rates. Interest rates remain attractive. Even with the Federal Reserve’s increase in short-term interest rates over the past twelve months, interest rates for financing commercial real estate remain at historically attractive levels. Both variable and fixed-rate products remain available in the marketplace. Based upon your time horizon, holding, need for flexibility and interest rate outlook, an examination of fixed versus variable rate financing should be a key component of your financing analysis.
2. Type of Property. Commercial real estate is often classified as either owner-operated or investment real estate. Different lenders and products exist within the marketplace for these distinct classes of real estate. Be sure to choose the appropriate financing partner based upon your type of property.
3. Due Diligence. In addition to the credit underwriting and economic performance of your real estate (including the business using the real estate), due diligence remains a key requirement of lenders. This includes title, insurance, environmental review and an analysis of all contractual relationships impacting the real estate (e.g., leases). The status and results of the due diligence may impact the financing and timing of your transaction.
4. Products and Players. The number and type of financing products (and the number of parties offering financing) may be at an all-time high. Managing interest rates through swap contracts or other derivative products is no longer limited to large real estate financing transactions. Real estate financing that will be resold in a securitization may allow limited personal guaranties. However, be aware of any tradeoffs associated with different types of financing. A thorough understanding of the market and the available financing alternatives is fundamental in selecting the appropriate financing for your real estate.
5. Work with an Experienced Team. Completing a real estate financing transaction with effective terms requires use of key tools, knowledge of products and marketplace, and prompt and effective issue resolution. Work with advisors who can assist you in concluding your transaction.
From Monroe Moxness Berg PA Summer 2006 Newsletter