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Five Reasons That Banks Reject Commercial Mortgages
his article highlights the Commercial borrowers are likely
five main reasons that to be confused when they are
banks decline commercial turned down and will be unsure as
mortgage loan applications. The to why it happened and what to do
reasons provided below do not next. For each of the five major
represent obscure issues, so it reasons that a bank might decline
is likely that two or three of a commercial real estate loan, a
the reasons described will be strategy is provided for
important for typical commercial converting the declined loan into
mortgage situations. The first an approved commercial mortgage.
two reasons (business plans and
tax returns) will potentially Reason # 1:
impact all commercial borrowers. A bank's loan officer or loan
Many commercial loan officers underwriter is not satisfied that
will start their loan review the business plan provided by the
process by stating some variation commercial borrower supports the
of “Can you show me your business requested loan.
plan?” and “We will need to see
several years of tax returns”. Strategy # 1:
Most commercial borrowers will
Many commercial projects are too benefit directly from dealing
unique for traditional commercial with a commercial lender that
banks. In these situations (even does not require a business plan
if a commercial borrower has due to the following major
favorable tax returns and an benefits:
adequate business plan), it is
not unusual for commercial (1) Reduce commercial mortgage
borrowers to be declined for a costs by thousands of dollars. A
commercial mortgage loan by a common range for an average
traditional commercial lender. business plan (prepared to
typical bank specifications) directly from the IRS) is
would be $5,000 to $10,000. routinely required by most
traditional banks. Some lenders
(2) Reduce mortgage closing time require this form in addition to
by several months. Business plans current tax returns.
can be prepared before or after
applying for a loan, but either Strategy # 2:
way the net extra time required Business loan borrowers will
will probably be 1-2 months or NEVER have Reason Number 2 to
more. worry about if they are applying
for a "Stated Income" commercial
(3) If the lender does not real estate loan. Very few
require a business plan, there is traditional banks use Stated
one less item standing between Income (no tax returns, no income
the commercial borrower and their verification, no IRS Form 4506)
approved loan. for a commercial mortgage.
Commercial borrowers should seek
Reason # 2: out lenders using Stated Income
Loan underwriters find something Commercial Loans and "Limited
on a tax return that disqualifies Documentation Requirements". This
a borrower under the bank's strategy will not work for all
lending guidelines. This commercial mortgages since there
"something" will frequently be is a maximum loan amount of $2-3
insufficient net income, but when million for most Stated Income
loan underwriters look at tax Commercial Mortgage Programs.
returns, there are many other
possibilities which produce a Reason # 3:
similar result. For example, IRS The bank does not generally make
Form 4506 (which authorizes the business loans for the type of
lender to obtain tax returns business involved or imposes
special requirements that make are interested in unique or
the loan impractical for the special purpose properties.
commercial borrower. Fewer and
fewer banks are making loans to Reason # 4:
bar/restaurant properties. When a business is refinancing
Similarly, auto service their current commercial mortgage
businesses are frequently given and wants to get a significant
unnecessary (and expensive) amount of cash out for various
environmental reporting uses, it is not unusual for the
requirements. There are many bank to limit the amount of cash
"special purpose" properties such to amounts as small as $100,000.
as funeral homes, nursing homes, Even though the bank might make
assisted living facilities, RV the loan, if they won’t provide
parks, marinas, golf courses, bed the amount of cash needed by the
and breakfast, day care centers, commercial borrower, this is
churches and car washes that most equivalent to declining the loan.
traditional banks will not
include in their business lending Strategy # 4:
portfolio. As mentioned in Strategy Number
3, there are better options
Strategy # 3: available elsewhere! The
For most business borrowers that commercial borrower's mission
can get approved at a traditional (and it is not impossible at all)
bank, there are better options is to use a commercial real
available elsewhere. And "better estate lender that will allow
options" are clearly available them to get much larger amounts
ONLY elsewhere when the bank of unrestricted cash out of a
won’t make the business loan in commercial refinancing, i.e. more
the first place! There are very cash out and no restrictions on
capable commercial lenders that what they do with it.
The situations described above
Reason # 5: represent five common examples of
The bank will not provide a commercial mortgage problems that
business loan without adequate can be avoided. Please see
collateral, usually in the form http://steve.bush.googlepages.com
of a lien on personal assets such /home for a review of twelve
as the commercial borrower's commercial real estate loan
home. problems that commercial
borrowers should (and can) avoid.
Strategy # 5: Another practical summary (
Commercial mortgage borrowers http://aexcommercialfinancing.com
should seek out lenders that do /_wsn/page9.html ) provides 14
not "cross collateralize" assets reasons that a commercial
as a condition for obtaining a borrower might not go to a bank
business loan. This will provide for a commercial real estate
greater flexibility for the loan.
commercial borrower and avoid
unnecessary (and unwise) Copyright 2005-2006 AEX
connections between personal and Commercial Financing Group, LLC.
business assets. All Rights Reserved.
About the Author:
Steve Bush is the Chief Executive Officer of AEX Commercial Financing Group, LLC and the publisher of The Commercial Real Estate Loans and Commercial Mortgages Guide and The Credit Card Receivables Guide. Contact: (888) 593-3951.
Read more articles by: Stephen Bush
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