StThomasHarborFor small businesses that are in the market to expand or to take up more permanent residency in a community, purchasing commercial property can be an effective and prudent option. But because most small businesses don’t have the cash on hand to purchase property outright, they need another means of funding the purchase.

This is where the commercial mortgage enters the picture. If you’re a business owner interested in owning property, a commercial mortgage allows you to make the purchase without having to pull together all the funds at once. In this way, it functions just like a residential mortgage.

A commercial mortgage, however, is likely to have some different restrictions and be more complex than a residential one, both during the application process and once it goes into effect. Here’s a look at some of the key factors involved in commercial real estate mortgage agreements:

  • Documentation: Perhaps unsurprisingly, getting a commercial mortgage involves a considerable amount of paperwork. First and foremost is documentation of your business’ earnings over the past few years. In addition, the lender may require other documents related to your business, including tax returns, leases and documents indicating the value of any business property you might have.
  • Debt coverage ratio: Obviously, whether your business will be able to pay back the loan is going to be the primary concern of the lender. Your debt coverage ratio—which takes into account your company’s monthly income and the amount you can reasonably be expected to pay each month toward your debt—is one of the key factors that will be taken into account when determining whether your mortgage application is approved.
  • Expectations beyond repayment: For most residential mortgages, simply repaying the loan is enough to satisfy the lender. But for commercial mortgages, there are likely to be other requirements you’ll need to account for. One of the most common is a stipulation that requires your business to earn a certain amount per month to ensure you stay on top of payments. Failure to do so can lead to penalties, with foreclosure being a worst-case scenario.
  • Unexpected expenses: In much the same way that buying a house often involves paying for things like inspections, getting a commercial mortgage rarely comes without additional charges. You’ll need to prepare to pay application fees and various banking charges, along with fees related to any surveys or appraisals that may be required.

Needless to say, obtaining a commercial mortgage is often a difficult and potentially time-consuming process, but it can really be worth it if you are committed to owning property for your business.

BoltNagi is an established and respected business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.