5 Considerations for Taking an Office Loan
Looking to finance an office building? There’s lots to think about, but don’t overlook these five key elements.
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Buying or building your first office property? You'll likely need to get an office financing loan. If you’re familiar with financing other types of real estate, that’s great — but there are some distinct differences compared to, say, financing an industrial, multifamily, or retail asset.
For one, loan-to-value ratios are typically a bit lower in the office realm compared to, say, the multifamily property sector. Loan terms are generally much shorter, too. While some multifamily loans may offer terms of 30 or more years, the majority of office loans mature after 10 years. Debt service coverage ratio requirements are significantly higher, too.
But maybe you’re a seasoned professional, and you already know the basics. Even so, it's critical to carefully consider all of your options before taking out an office real estate loan, whether it’s to develop, acquire, or refinance your office building.
If you have evaluated a potential office investment and plan to move forward with a loan, there are many important factors to consider. Here are five key things to keep in mind:
Know Your Office Market
Before you even start looking for an office loan, it's important to have a firm understanding of the office market in which you're looking to buy or refinance. They will have a measurable impact on the loan terms you will get — after all, your lender will have done their homework, too.
Not sure where to begin? Many major real estate investment brokerage firms, like Cushman & Wakefield, CBRE, and Colliers, put out regular reports — usually quarterly — covering what’s happening in most primary and secondary markets across the country.
Grab a cup of coffee, get a couple of those in front of you, and take a few minutes to research average rental rates, vacancy rates, and other key market indicators in your area. This will help you get a sense of the overall health of the market and the potential for future growth. Compare that with your property — how does it measure up?
What Kind of Office Loan Is Right for You?
There are a variety of office loans available, each with its own set of pros and cons. Traditional lenders, like banks and credit unions are very active in the office sector, as are life companies, CMBS lenders, and private debt funds. Each lender type has specific advantages — and some potential drawbacks — so it’s good to understand the options available to you.
Beyond the lender type, the purpose of the loan matters a great deal. Do you need bridge financing while you work on leasing the property’s vacant space? Will a standard permanent financing option best suit your needs? Are you expanding, renovating, or even developing your building from the ground up? All have different financing needs — and different financing costs and requirements.
How to Navigate the Office Loan Process
Like any commercial real estate loan process, getting an office loan can be a challenge. There are a ton of required documents, of course, and it’s certainly worth reviewing everything you’ll need, from lease schedules to profit-and-loss statements.
The real difficulty in getting your office loan is getting the right loan with the right terms. Finding the best lender to meet your needs can be exceptionally challenging, even if you’re an experienced investor. After all, the lender you’ve always worked with — whether for office real estate or properties in another asset class — may not be able to offer you the best terms, and you may not even be aware of what the best terms possible are.
This is where working with our platform can bring a ton of value and take the headache out of applying for 20 different loans with 20 different lenders (usually with 20 different application forms). Click the form below, and we can get you a free quote — and match you with the best office financing product to meet your unique needs.
What Is Your Office Real Estate Investment Strategy?
Okay, now that the marketing talk from the previous bullet is done with, let’s talk strategy.
Before taking out an office loan, it's important to have a clear investment strategy in place. What are your goals for the property? And how will you achieve those goals? Does the building need to be renovated? Would capital improvements boost leasing income, or will your leases price your space out of the market?
Answering these questions is an essential part of determining the risk of an office property investment — and in understanding what type of loan terms would best serve your needs. It’s not just about what you’ll do while you own the property, though.
How Will You Exit Your Investment?
All good things must come to an end. Along those lines, you probably aren’t planning to hold onto an office property forever. Do you know how you’ll exit your investment when the time comes?
There are several different ways to manage a successful exit, of course. And knowing how you'll exit an investment will help you determine the best type of loan to finance your office purchase. If you plan to sell once you’ve completed capital improvements on a value-add opportunity, for example, you may not wish to cross-collateralize the loan with a longer-term investment. Perhaps even a shorter-term bridge loan could be a good option, depending on the total investment period.
Once you have a plan, you can see which loan terms are more important to you than others. The lower debt servicing costs of an interest-only loan may be worth the added risk for some strategies. If you plan to hold a property for a five- or 10-year period and want access to larger cash flows, perhaps a longer amortization period would suit your needs.
No matter your strategy for entering and exiting an office investment, clearly understanding your goals will ensure you are better informed during the loan application process. Need help? Fill out the form below, and we’ll get in touch with you to take you through which options are the best for your situation.
What are the most important factors to consider when taking out an office loan?
The most important factors to consider when taking out an office loan are:
- Know your office market - https://www.commercialrealestate.loans/blog/getting-a-commercial-mortgage-alert-for-better-loan-terms
- Have a clear investment strategy - www.commercialrealestate.loans/blog/5-considerations-for-taking-an-office-loan
- Understand the loan terms - https://www.commercialrealestate.loans/blog/understanding-commercial-real-estate-loan-terms
- Know the loan options - https://www.commercialrealestate.loans/blog/types-of-commercial-real-estate-loans
- Understand the loan process - https://www.commercialrealestate.loans/blog/the-commercial-real-estate-loan-process
What are the benefits of taking out an office loan?
The benefits of taking out an office loan depend on the type of loan you choose. Traditional lenders, like banks and credit unions, offer competitive interest rates and flexible repayment terms. Life companies offer long-term, fixed-rate loans with low interest rates and no prepayment penalties. CMBS lenders offer non-recourse loans with competitive interest rates and flexible terms. Private debt funds offer short-term bridge loans with competitive interest rates and flexible repayment terms. Each loan type has its own advantages and disadvantages, so it's important to understand the options available to you before making a decision.
No matter which loan type you choose, understanding your goals and exit strategy will help you make an informed decision. If you need help, contact us and we'll be happy to discuss which loan options are best for your situation.
What are the risks associated with taking out an office loan?
The risks associated with taking out an office loan depend on the type of loan you take out and the purpose of the loan. Traditional lenders, like banks and credit unions, may have more stringent requirements and higher interest rates than other lenders, such as life companies, CMBS lenders, and private debt funds. Additionally, bridge financing may be more expensive than permanent financing, and loans for development or renovation may have higher interest rates and require more collateral than other types of loans. It is important to understand the risks associated with each type of loan before taking one out.
What types of office loans are available?
There are a variety of office loans available, each with its own set of pros and cons. Traditional lenders, like banks and credit unions are very active in the office sector, as are life companies, CMBS lenders, and private debt funds. Beyond the lender type, the purpose of the loan matters a great deal. Do you need bridge financing while you work on leasing the property’s vacant space? Will a standard permanent financing option best suit your needs? Are you expanding, renovating, or even developing your building from the ground up? All have different financing needs — and different financing costs and requirements.
With years of commercial mortgage experience as a leading financial intermediary, Commercial Real Estate Loans leverages its rolodex of lenders to finance office properties of all types. Office property sub-classes include Low Rise (< 7 stories), Mid Rise (7-25 stories), High Rise (25+ stories), as well as offices in the Central Business District of a city or on the outskirts. We also have a robust platform for financing medical office space.
What are the repayment terms for an office loan?
The repayment terms for an office loan can vary depending on the individual customer. Generally, our office loan terms include a loan size of $500,000+, a loan term of 3, 5, 7 and 10-year fixed-rate terms, an amortization of 15, 20, 25 and 30-year options, a leverage of 75%- 90% LTV allowance, a DSCR of 1.30 minimum, and a credit score requirement of 660 minimum. For more information, please visit our medical office loan page.
What documents are required to apply for an office loan?
You'll need a few documents to apply for an office loan. These include:
- Tax returns: This includes personal income tax returns along with business returns, if applicable. This may also include K-1 statements for partnerships or S corporation shareholders.
- Income statements and balance sheets: These are financial documents that provide a snapshot into the business’s performance, its assets, and its liabilities.
- Bank statements: You're going to need business and personal bank statements.
- Business legal documents: These could include business certificates, licenses, and contracts where applicable.
- Business plan: You will need to demonstrate your business has a feasible business plan.
For more information, you can check out this article and this guide.