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Commercial real estate financing is very different from home financing. In the latter, the transaction is based on the value of the home at the time of the sale. When taking financing for your commercial property purchase, however, financial institutions will base it, in part, on the value of the business in the future. In addition, commercial real estate financing can take on very different terms. The way the deals are structured is based on a number of factors such as:

- Anticipated use of the property:
- Anticipated returns from the property;
- Geography;
- Type of real estate;
- Size of real estate;
- Perceived risk to lender;
- Market conditions.

Prior to taking up a loan, investors need to do their due diligence by examining each of these areas carefully. Investors then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth.

There are many ways to finance your property purchase, be it from mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and private investors. It is not advisable to pay 100 percent for your commercial real estate purchase. In the current economic climate, you can get up to 75 percent financing.

Different banks provide different packages to suit your needs. Banks like HSBC, for instance, has an Investment Property Loan programme which provides a comprehensive and attractively priced property-financing package for individuals buying commercial properties for investment purposes. Their loan programme includes attractive interest rates, flexible terms to tailor your loan to suit your individual needs, high upfront legal fee subsidy, free fire insurance for one year and free valuation. Not all banks, however, readily post this information online. Therefore, investors will need to do their own market research by enquiring personally with the banks on whether their financing packages are viable for the long-term.

Most banks have a list of requirements when it comes to financing income-producing properties such as a shopping mall, office building or commercial warehouses. In general, here are the requirements:

1) Banks will usually not finance more than 75 percent of the appraised value of the property.

2) Properties must show sufficient debt-repayment ability by way of a ratio of 1:20X or higher. Debt Repayment Ratio is calculated as Net Operating Income / Total Annual Debt Burden.

3) In the case that a sole tenant occupies the property financed, investors might want to take a look at the financial strength of the tenant.

Although there are many types of financing available, investors should assess their level of risk. Ask yourself, can you afford the property? What is your cash position like? Are you looking to just pay 25 percent first and take a bank loan for the remaining 75 percent? Will you have sufficient cash to buffer yourself during an economic downturn? Can you afford the fluctuating bank interest rates? Going through all the possible commercial factors will help you eliminate your risks and anticipate any shocks in the market. The following documentation must be ready prior to taking up a loan:

    * Income and expense statement for the property demonstrating a solid income stream;
    * Financial statements on all principals involved as owners of the property;
    * Profiles of the management team;
    * Property appraisal;
    * Financial statements on the borrowing entity;
    * Plans, including construction blueprints (if available) for the use of the property.
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