Real Estate Financing

Compared to financing business operations, obtaining financing for real estate purchase or improvement is a borrower's "piece of cake." And of course, a business that owns real property can always use it as collateral for a cash equity loan. Many businesses that buy land and buildings at their inception find a few years later that the real property has increased in value far more than the business operation itself.

Lenders are almost always willing to loan money, even to a shaky business enterprise, with real estate as collateral. The reasons: land isn't going anywhere, it will always be marketable, it retains value, and it can easily be appraised as to exact value.

The Commercial Mortgage

Although home mortgages can almost always be written by filling in the blanks on a printed form, commercial real estate financing deals each have to be customized. That is because there are so many more variables involved in these deals, including zoning, occupancy, the proposed business use, licensing of occupants, degree of risk and the credit of the land owner. Some types of commercial real estate used for rapid turnover businesses like restaurants or gas stations are unattractive to lenders. Others like apartment houses are better bets for financing.

Financiers are also wary of land that may have been used in the past for purpose that produced environmental damage or toxic wastes. Under federal law subsequent owners are made responsible for clean up costs once land is found to have such problems, a factor that instantly diminishes land value.

You may also find it difficult to raise money with vacant land. Unimproved real estate has a significantly lower value than improved land (that is, land with buildings) and lenders are reluctant to finance such real estate because of the risk involved in recouping their investment.

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