Money makes the world go round, and this is very true for businesses related to real estate. One of the ways to increase capital is through asset-based lending for commercial real estate. But how does this work, and what are the laws that apply to these deals?
What is asset-based lending for commercial real estate?
Asset-based lending is a transaction where the borrower (or debtor) uses its own property (real estate or personal property) as collateral or security for a loan. In this legally binding agreement, the loan approval by the lender (or creditor) depends on the borrower's capacity to pay and the collateral required.
As a sub-area of this type of transaction, asset-based lending for commercial real estate is a transaction where the security involved is the investment property of the borrower. The loan is used:
- to develop the subject property used as security
- to purchase another property for development
Depending on the agreement of both parties, the lender will usually approve the amount of loan based on one of the following:
- the value of the property used as the collateral: the property may be appraised, by both parties or the lender, and this appraised value will serve as the basis for the loan
- the projected income of the collateral property: usually, the property is developed to generate income (e.g., as a commercial space or building), and the basis of the loan is its projected income based on financial studies
Of course, the higher the value of the property or the projected income, the higher the granted loan.
Here’s an example of how asset-based lending works:
If you’re curious about how asset-based lending applies to commercial real estate businesses, consult with a legal expert near your area. Quebecer businesses can talk to a Lexpert-ranked best asset-based lending lawyer in Québec.
Benefits of asset-based lending for commercial real estate
Investors of real estate projects or real estate developers tend to rely on asset-based lending for commercial real estate because of its several advantages. However, these benefits will also depend on some factors, the most important of which is the loan contract agreed by the parties.
Better choice for starting real estate businesses
The real estate business is clearly capital-intensive, and it does not help that revenue comes only after a few years, such as when a project is already fully operational. Among the limited options for businesses are asset-based lending for commercial real estate. Aside from the fact that the borrower retains the property as part of its assets, it’s also used in two ways:
- as a collateral to acquire more capital
- to generate income in the future
An alternative for financial commercial real estate needs
Depending on the institution that offers the loan, an asset-based lending for commercial real estate is an alternative to traditional sources of funds. When offered by financial institutions other than banks, the contract is usually flexible. This means that it can be negotiated to adjust to the wants and needs of both parties.
Although regulated by the government, borrowers must still be cautious when transacting with these institutions. Consult an asset-based lending lawyer before entering into this loan type.
Can accommodate borrowers usually denied by others
One advantage of asset-based lending for commercial real estate is that borrowers can acquire loans even if they have a bad credit score or financial history. Because the loan is already secured by the subject real property, the lenders are somehow assured, making it easier for them to approve the loan. If the borrower cannot pay its obligations, the lender can still recover by foreclosing on the collateral.
What are the types of assets used in commercial real estate lending?
Asset-based lending for commercial real estate can be used for:
- educational or research: buildings for schools, universities, research centres, or their extensions
- industrial: factories or plants for manufacturing and production of goods (e.g., textile, chemical, food, tech), or warehouses for storage
- multi-family: residential buildings for profit (e.g., apartments, condominiums, housing), which can also be mixed with commercial spaces
- office: single- or multi-storey buildings with multiple office spaces for different tenants, which can be for sale, rent, or lease
- retail: buildings that can be occupied by different businesses (e.g., malls) of varying sectors (e.g., restaurants, stores), or for use by a single proprietor
What laws apply to asset-based lending for commercial real estate?
Asset-based lending for commercial real estate is heavily influenced by commercial laws, which can be divided into different legal areas. To fully understand these laws, and as applied to one’s specific circumstances, it’s still best to consult with an asset-based lending lawyer.
Here are some legal considerations when entering into an asset-based lending for commercial real estate:
Laws on contracts
Since a loan is normally entered through a contract — whether written or not — the law on perfecting, implementing, and enforcing contracts will apply. These are found in common law principles, the Civil Code of Québec, and other provincial laws.
Agreements on security are also covered by these laws. Provincial laws may also require the registration of security over personal properties (e.g., machinery, equipment) and real properties (i.e., land). As for interests (such as security) over a piece of land, registration is done with the provincial land registry system.
Consumer protection laws
Granting credits and loans fall under consumer protection laws, especially at the provincial level. As the name of these laws suggest, its aim is to protect borrowers from unfair or fraudulent practices by financial institutions.
One highlight of these laws is that it requires lenders to fully disclose and inform borrowers of all the details of the loan. This applies to a loan contract’s interest rates, payment schedule, term, and other charges.
Is asset-based lending a good option?
Asset-based lending for commercial real estate provides a powerful financing option for businesses looking to invest in property without depleting their cash reserves. By using commercial real estate as collateral, companies can access larger loan amounts with potentially more favourable terms. To maximize the benefits of asset-based lending, it’s always best to seek expert legal advice. That way, business owners can make informed decisions in making their real estate venture a success with minimal financial risks.
Interested to know more about asset-based lending for commercial real estate? Reach out to any of the best asset-based lending lawyers in Canada as ranked by Lexpert.