Financing commercial properties or income-producing real estate is not an exact science. It requires subjective analysis, experience, and an ability to be innovative and creative. It is especially important to know the fundamentals lenders will be looking closely at in order to fund a specific type of commercial property.

But one thing is certain. Across all commercial property types, some fundamentals do not change. Virtually every commercial project is analyzed by location, physical property and borrower strength.

Generally, the location must be suitable for the project. The location elements that commercial lenders typically consider are:

- Compatibility with environment
- Functionality of entrances and exits
- Transportation options
- Workforce potential
- Utilities and zoning in the area
- Other characteristics of the location and market

Proper financing can greatly enhance a commercial location, while poor financing can squander an otherwise excellent location. Many commercial projects in good locations have been ruined by poor financing, and it is not at all uncommon to find commercial projects in marginal locations that have been successful because of strong financing.

When looking at the physical property itself, commercial lenders usually analyze:

- The size of the facility
- The parking situation
- Drive-by appeal
- On-site amenities
- Physical and mechanical components of the building
- Functional and economic utility
- Physically and economically obsolete aspects

In assessing most of these elements, common sense may be the most important tool. To illustrate this point, consider an apartment with no bathroom or a "full-service" hotel without adequate parking. Commercial lenders must be able to judge the project for its current and future market appeal, and function plays a large role.

It goes without saying that components that go into the physical property must be technically sound. These include the foundations, heating and air conditioning, lighting, ceilings and windows.

Commercial lenders also often require further explanation when it comes to general-purpose, limited-purpose or single-purpose properties. General-purpose properties are those for which there is a competitive rental demand with generally accepted physical characteristics that appeal to many general users. Examples are warehouses and retail stores. A limited-purpose property would be a facility like a service station or department store capable of conversion to another use. A single-purpose property would be a facility such as an oil refinery that is difficult to convert.

When looking at borrower strength, lenders will want to analyze the property's developer and manager. Although an individual partnership or corporation may develop the real estate, it may not manage the property, collect the rent and pay the debt.

Commercial lenders also want to look at what other properties the developer has produced - particularly, those similar to the subject property. Developing includes finding the land, arranging for physical development, arranging for financing and bringing the concept to fruition. A commercial lender should know the amount of real estate actually managed by the sponsorship group and be fully aware of its payment record.

Overall, to be successful when evaluating a commercial financing project, it is important to understand these three basic characteristics of a given project - location, physical property and borrower strength.

Lorenzo Hills, managing director of East Coast Commercial Finance
Lorenzo is located in Charlotte, N.C., and can be reached at 980-226-6746.

---