7/12/20: Seg 4: The 411 on Business & Commercial Loans

Speaker 0 (0s): Your personal coach and trusted attorney, Andrew Lieb helps you get started on building your real estate empire, grow your self-confidence, find your grit and get the skills needed to dominate the real estate world. This is real estate investing with Andrew Lieb. Lauren - I'm still shaking from the shark thing. I know he told us about Alec Baldwin. All I'm thinking is Alex Trump interpretation and everything else. But I, the shark thing is, Oh, so before Eric came on and showed us how to be cool. 

And I think I'm not going to be cool. Now, if you have to, if you have to swim with sharks to be cool, I'm not interested. But before that, we were talking about going back into opportunity with the pandemic it's calming down and where we were on your acquisition was getting a commercial loan. And when we say a commercial loan, it could be a residential loan. It's about getting an income producing loan for other than your primary residence. Let's talk about that. There's Lauren does that and we had a question and the question went like this. Should I just pay with cash? If I have the cash Lauren, or should I get a loan? 

What do you think 

Speaker 1 (1m 11s): First off right now loans are at really good rates. So I would definitely contact different types of lenders right now. There's their institutional lenders. There's your credit unions. Different banks require different things. I will warn you though that if you go and get a business loan, which many people get the actual business loan for the commercial property, especially if you want it to be owner occupied, there is a ton of very strict things that they need. 

Speaker 0 (1m 37s): So it's not like getting our loan on your house. And yes, they're both around 3%. I know people that are getting loans at 2.6% right now, but you could be at 3%, you can be under 3%, maybe a little more than 3%, but the process to get a primary residence, conventional loan, and the process to get a business loan or commercial property are just entirely different. And I wanted to bring you to reality. Now, before we get there, before we get there, some people do get primary residence loans because there's this law called the Saint Germain act. 

And what that says what the Saint Germain act is that there's a thing in a loan called a due on sale clause. And in due on sale clause says, if you're going to transfer the ownership of this property, you have to pay off the loan. But the Saint Germain act says, if you lease a property to someone for under three years, if the lease is for less than three years, you could do multiple one-year, two year leases that that due on sale clause is ineffective. And what that means is that if it's a primary residence, you can lease out a primary residence without the due on sale clause. 

Coming in that being said, there's a whole nother insurance can of worms. What Lauren's getting into though, is when you're going to actually get that bigger property, that income producing property. Tell me about that. 

Speaker 1 (2m 51s): I would say this could be your reach property, the property that requires a, you know, you to have multiple tenants in there, or just anything that you're taking out a significant loan. So first off banks require financial statements for any business that you're naming in the loan. A lot of the times, it's not just going to be personal. You might actually put the loan under the business that you're operating his name. 

Speaker 0 (3m 13s): And when she says banks, she's talking about whoever the actual person that's gonna be underwriting it. You could speak to all different originators and originators, the license that could be from the broker that can be a loan officer in the industry. Most people are called ellos or loan officers. That's who the key you're going to talk to, whether they're a broker or a banker, the person you speak to that's originating the loan with you is the loan officer. So what Lauren's saying, and I thought this was interesting is that they're gonna have all sorts of businesses that you own be a part of this loan. Tell me about that. 

Speaker 1 (3m 43s): Well, they're going to require, they're going to say, are you a member of any other businesses? And then if you say yes, then they're going to say, great. I'm going to require all of your businesses to, to sign off on this loan. 

Speaker 0 (3m 56s): So the more businesses you have, the more annoying it is to get alone. And as we know in real estate, what we want to do is put each piece of real estate in its own business. Why? Because when it has its own limited liability company or corporation, we get what's called the corporate shield around it. So any exposure from that business doesn't trickle through to other properties. So as you get bigger and bigger and bigger, and then you acquire more loans, it becomes increasingly more onerous to get a loan because you have to give all the financial information from all of your businesses. 

Speaker 1 (4m 27s): Yeah. And so they're going to want tax returns per probably about two to three years per business. They're going to want financial statements, profit and loss statements. They're also gonna want you to keep a minimum amount of cash in their bank. 

Speaker 0 (4m 42s): When you say minimum amount of cash, I once had someone say to me, if I want that loan, I have to put a million dollars in the bank. And I said back to him, if I had a million dollars to put it in the bank, why don't I just put it in a bond or some point like that and not buy the property? Like at the end of the day, like if you're going to put that type of money, you're going to reserve in the bank, you have to, it's a give and take. So a lot of these lenders, when I said that 2.6, that person put a million dollars in the bank. You have to have enough money to get some of the rates. A lot of people like to send to me, I got this rate. I think I want to get it to well, banks change their rules depending on how much money you're willing to give them. 

Speaker 1 (5m 18s): Yeah. So be careful because you can have the minimum amount of cash that they require in these banks could be a significant amount. They're also going to want to review every existing lease. That's already in the property that you're purchasing. And if they find a discrepancy in the lease, they might, they might not give you money. 

Speaker 0 (5m 37s): They generally don't consider a lease for under two years to be reliable. So one of the things when we're buying property is that we negotiate before we even make an offer. As we get this nondisclosure agreement, like we talked about a few weeks ago and we say, we need a copy, or at least, and we go through the leases and we see any leases under two years and we go, that's going to be a problem. And what we do is we calculate our capitalization rate based on the income that we can actually show as reliable and say, Hey, that's a number that's going to affect how much we can give you because our blender's not going to give us the money. 

Speaker 1 (6m 8s): So if you're in contract right now, and one of the tenants is leases expire in September, and you're trying to get alone. That's not going to count towards income because there's no renewal on that lease. Okay. 

Speaker 0 (6m 17s): Especially if it's a five year lease, but they have a 30 day out. Lauren was talking about that a few weeks ago that yeah, some of these leases say they're real long terms, but then they have a way for them to be canceled and that's non reliable. So they're going to want the leases. What else they want Lauren. 

Speaker 1 (6m 31s): Oh, so then they're going to want to look at your, when they look at your financial statements and your tax returns, they're actually going to come back and they're going to question if you are higher or lower in some quarters or some years when I'm high. I don't understand. Sorry, not, you're not a, you're not doing that, but no, no, no, no, no. I'm saying that. Let's just say one year you made a million dollars worth of rent. 

Speaker 0 (6m 54s): When you said, you mean your businesses are making more or less margin. I just heard you say when you're high, I thought that was like a component. 

Speaker 1 (7m 1s): No, sorry. Okay. Then the next year you were making $800,000 in revenue. They're going to say what happened. 

Speaker 0 (7m 7s): So they want explanations when your business is fluctuating. They like stability is what you're trying to say. 

Speaker 1 (7m 12s): They want to understand who you are. Basically. They want to understand if they're going to put their risk on you, that you're not going to foreclose. Then they're going to want a projected revenue for the upcoming fiscal years. And they're going to want you to pretty much give them a business plan of how you're going to be making money. Yeah. 

Speaker 0 (7m 29s): And this isn't just from the business that you're going to be investing in. This is about your other businesses. 

Speaker 1 (7m 33s): Well, all your personal ways that you can make money, they want to plan for how you expect to make money. So, you know, with your tax returns, they might actually question every expense on that tax return. They're going to feel like, why did you spend X amount of money on office supplies this year? They could really go into the details of that and ask you those questions. It's very invasive. 

Speaker 0 (7m 55s): And not only do they care about your businesses and everything else, they want to check out the property, just be, as you think it's worth something, they might not. There's going to be appraisals. They're going to make sure that they're certified appraiser. I hope you know, there's two licensed categories. One's called a licensed appraiser. And then there's a certified appraiser, a licensed appraisers for someone that's buying or doing a generic house or certified appraisers for a unique type of structure, they're going to get their appraisal. They're not just going to stop there. They're going to say, Hey, are there any environmental hazards there? 

That's called a phase one environmental where they're going to do a compliance of all the records on the property. Now, just to be clear, you may not be done with a phase one environmental. Let's say hypothetically, they find out that there was a gas station on the property or something along the lines previously, they're going to probably want to phase two where they start getting invasive and they start finding out and doing their own soil sample. 

Speaker 1 (8m 48s): And that's very expensive. 

Speaker 0 (8m 50s): Tens of thousands of dollars. 

Speaker 1 (8m 52s): You have to put that into your costs because you have pay for these things. 

Speaker 0 (8m 57s): Yeah. They're also going to want to survey because they're going to want to make sure that all the properties within your boundary lines, one of the biggest things my law firm ends up getting involved with is out of possession issues. When one person builds on someone else's land and why does that matter? I was just doing a consult the other day. And he said, Hey, this prospect. And he goes to me, Hey, someone wants part of my property. They want me to sign and say that it's their property inside of possession. I don't really care. And you always said back to him, we need to check the minimum setback from the town requirements to make sure that your building wouldn't then be in the setback for illustration. 

Let's assume the town says your structure has to be 15 feet from the lot line. And you built it exactly 15 feet from the hotline. And let's assume that there's an issue where wait a second, the first foot was your neighbor's property. Oh, now the first foot of your structure is illegally there in either you need to get a variance or a sledgehammer to take it down. So they're going to want to make sure when they're buying property, that the property on the survey is exactly in the right locations out. So what does a survey that someone who sang here's the meets and bounds of the property and hear how it works on a map and here's how it is from the distances. 

So beyond that, they're going to want to know if you're in a flood zone, they're going to want to see your property insurance. They're going to want to go through all your accounts receivables, but here's the one that gets me the most. They're going to want guarantees. They're not just going to want a guarantee from you. They're going to want a guarantee from each of your businesses saying, Hey, if you default on this loan, they can't just Sue to foreclose this property. They can Sue you personally. They can Sue your other businesses. They can Sue everyone. So it's a much more onerous process when you're doing a commercial loan. 

When you're getting one of these business loan than a residential one that doesn't make it bad. You just have to have this in reality when you're thinking about it. 

Speaker 1 (10m 48s): So I just want to go back to a, you just talked about the accounts receivable aging report, which just so interesting is now in the COVID world, they're going to be looking at all the companies that owe you money, and they're going to want a risk assessment of, are they going to be paying for that? And another interesting thing that I'm hearing right now is banks are requiring you to give them if you have a loan with them right now, they're asking all of their customers to give them profit and loss statements. As of April may. 

Speaker 0 (11m 17s): Well, Lauren's saying is that when you deal with a business loan, it's not just getting the loan that you have to do this entire audit. You're going to have to do it annually and potentially quarterly into the future. Part of the game of being in business is keeping your books and records and your financial statements to date. And if you're looking to be able to buy a property like that, I want you to speak to my friend Brynn Elliott and the Brynn Elliott team at Douglas Elliman real estate, who underwrote this segment, we're going to be going for the week and we wish you a great week. Swim with the sharks. Have a great time. We'll see you. Next week is real estate investing with find us on social media and listen to leave or visit, listen to leave.com.