The Dangers of Commercial Real Estate Financing

cropped-iStock_000000487050Small-1024x275As much as property investments are on the safer side of investments because of their physical collateral, there are still inherent dangers for both the borrower and the lender. Any time you venture into the commercial real estate financing world, you are running the risk of loss.

It is no secret that the upside of commercial investment and property development can end up being quite lucrative for the savvy and prepared investor. But such windfalls do not happen simply because of blind luck. There are just as many stories of the dangers of commercial real estate financing and the massive losses that can be incurred when things go wrong.

If you are looking to get into property investment, there are some key danger spots that you will want to look out for as indicators to the overall health of the market and your property specifically. One of those danger areas is the actual physical property. Many investors and borrowers have found themselves needed more and more commercial real estate financing due to the fact that property costs and construction costs end up being far more expensive than were originally anticipated. This danger only increases with the amount of construction that is going to be necessary to make the property profitable. Not only is this dangerous in costing the borrower even more money for upfront costs, but there is also a cost associated with the time that it will take to complete. The longer it takes, the more revenue the borrower is losing. This can be very dangerous when facing monthly payments.

Another danger comes from the bureaucracy of state and local governments. Depending on zoning laws in the local area, this can be a lengthy process and has the potential of really holding up development, especially with a new build, rather than a renovation. Commercial real estate financing that is contingent upon benchmarks can really put borrowers in a bind if there are regulatory issues and lots of red tape.

There is also the potential for additional costs and dangers to arise because of the property itself, outside of new construction. This is typically true of older properties that have experienced wear and tear. Using appraisal services and staying on top of routine maintenance will help to reduce or eliminate the impact that this might have on your commercial real estate financing.

With all of the dangers of commercial real estate financing, what can I do to prepare?

The single greatest thing that you, as a borrower, can do to prepare for the unexpected is to acquire as much knowledge as you possibly can about the property, construction costs, timelines and local permits and codes. If you keep up to speed on the factors that might affect your commercial real estate financing, then you are much less likely to be taken by surprise, even if there is a setback. There are many things that could happen that you cannot control, but if you know about the possibilities, you are more like to already have a plan in place to deal with the situation

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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