Commercial real estate has many valuable uses, from office space to property for a business, the possibilities are endless. As businesses grow and expand, they need more space!
Some of the more common methods of raising capital for commercial real estate projects is through investors or strategic partnerships. These types of partnerships can be informal or capped at a certain size investor, but still important to the success of the project.
Partnerships can come in the form of bank loans, purchased loan packages, or even stock financing. Although all of these options require a bit of paperwork and coordination, they can help spread the risk across different parties to raise money for the project.
This article will not talk about those individual topics, but will focus on general tips that can help raise money for your project.
Commercial real estate crowdfunding
Recent developments in commercial real estate financing have been focused on the use of crowdfunding. This has created a new way for commercial real estate investors to obtain capital.
Just as with funding via traditional banks or debtors, once a commercial property is purchased, additional funds can be obtained via debt or equity financing. However, instead of paying out of pocket for the financing, users of modern banking systems receive funds from private investors who pledge their property as security for the debt.
In return, the user receives a fair market value (or higher) price for their property. The new owners are able to efficiently use cash flow and leverage to help fund projects.
Raising capital from family and friends
This is the most common way to raise money in commercial real estate. Most individuals with spare cash can think of a way to invest your cash into property.
If you have a lot of capital, you can invest it in property. For example, if you have a large amount of capital, you can purchase an interest in a property. If you have less money but good credit and/or an established reputation for business operations, you may be able to apply for a loan.
The trick is finding the right bank or lending institution for your personal credit history and for this property investment project. It may take some time to get a loan if there are complications with debt and equity ownership, but eventually you will get one!
If someone else has the funds to take over the ownership of the property, then this additional person can raise more funds by selling additional interests. This way, they will obtain more equity in the property and they can outbid other potential buyers.
Raising capital from an established private investor
While not recommended, there are some cases where a new investor can successfully enter the commercial real estate business. These cases include large investors that are knowledgeable about the industry, have experience working with other investors to achieve goals, and have the funds to invest in a property.
The factors that determine if you are the right person to invest in a property are your skills, the amount of capital you want to raise, and the location of the property. It is important to note that this type of investment is not for those who do not want to work hard or who do not know how to put together a plan.
This article will discuss different strategies for raising capital in commercial real estate. While some tips may apply to both new and established investors, we will focus more on him or her because of the difference in size or need for capital.
Creating a partnership or corporation for your business
As the name suggests, a corporation or partnership can provide property financing at a lower cost than a conventional loan. A partnership is like a corporate body without the corporate legal structure.
As the name suggests, a corporation can provide more comprehensive insurance coverage for your business, which is useful. A partnership does not have the liability protection of a legal body, but it does have tax benefits because it is considered a separate entity from its owners.
A corporation can offer more flexible financing options such as credit and non-credit loans, as well as equity loans. With all these options, your capital needs to be spread out over multiple loans so they are used properly.
To help maximize your returns on investments, make sure you consider all your sources of financing when planning business growth.
Commercial real estate loan refinancing
A common method for raising money in commercial real estate is by taking a loan and refinancing it into a new loan. This new loan may or may not include a down payment, which is why it is referred to as a refinance.
This new loan can be used to purchase property or finance the purchase of property. Some properties that qualify for refinances are owned and occupied residential properties, but also commercial properties such as stores or restaurants.
A critical part of refinance financing is the quality of the refinance. The more favorable the terms of the original loan, the better the terms of the refinance.
There are several ways to address debt in general when your credit does not meet current standards. Credit scoring agencies such as Transunion and Fairfax & Robert Wells evaluate your credit history to determine if it is appropriate for current loans.
However, there are ways to reduce debt without significantly reducing value to your business.
Converting assets to cash
Once your business is generating cash, there are several ways to raise additional capital. Some ways include converting assets into cash, selling assets, and raising debt capital.
Converting assets into cash can include selling equity interests in existing businesses or acquiring new businesses. While this may not be practical for many companies, it can be a valuable tool in the INVESTment banker’s box of capitalSources.
For example, a company purchased a retail property with an asset-based mortgage (ABM) loan with an expectation that it would redevelop the property and re-form the former business. The redeveloped business would require additional loans to complete its financial plan and develop its plans.
As previously discussed, asset-based mortgages have significant underwriting standards that must be met before an applicant can get a loan. If you are aware of these standards prior to reviewing a new applicant, you may be able to save enough money to meet your investment objectives.
Exploring federal and state tax deductions
Commercial real estate taxation is a multisided issue. Property owners need to consider both federal and state tax deductions when seeking capital.
To increase your potential for tax savings, you must consider whether your property is located in a city or town with a built-in tax base, or if it is located in a non-built-in zone.
The amount of taxes that are applied to property depending on its market value can be enormous. To make the case for tax savings, you must demonstrate how your property performs relative to others in its market area.
STATE TAXES: While there are many different ways to find the best solution for identifying tax deductions on your property, looking into possible state tax exemptions may help narrow the search.
While it may not apply directly to your situation, this article may help you gain some additional knowledge about potential state tax deductions.
Improving your credit score
Re-filing your credit card bills can help improve your score. Banks assess your credit history using accounts and transactions over a period of time.
If you have had recent debtors’ filings or collections, your lender may have put you on their list of preferred customers so they can get more leeway in evaluating your credit history.
To get a higher credit score, make sure you are paying your debt in a timely manner. Paying off your loan in full in the shortest possible time will give you the best chance to improve your score.
If you have major loans such as a mortgage or student loan, look for ways to reduceyour monthly payments.