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.