Jamie Stadtmauer is the Vice President of Business Development at Agora and has over 20 years of experience in commercial real estate investing.
Jamie Stadtmauer is the Vice President of Business Development at Agora and has over 20 years of experience in commercial real estate investing.
Edited by Gilad Idisis
Gilad is a content manager at Agora. He holds a master’s degree (LL.M.) from Columbia Law School and a degree in Practical Electronics Engineering. Before becoming a content manager, Gilad practiced law as a commercial litigator.
Gilad is a content manager at Agora. He holds a master’s degree (LL.M.) from Columbia Law School and a degree in Practical Electronics Engineering. Before becoming a content manager, Gilad practiced law as a commercial litigator.
26 Jul 2023 7 min reading
In real estate parlance, equity refers to how much your property is worth and how much you owe on it. The higher your equity in a property, the more collateral you can offer and the greater the sum you can borrow against it. You can use this equity to borrow funds from a bank or a private lender. Your equity in the property is collateral for the lender who is advancing funds.
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We have already pointed out that when talking about “commercial real estate equity”, we’re referring to the equity you’ve built in the property. The remaining part of the property’s value is the sum owed on the mortgage. Let’s understand this concept taking a commercial equity loan as an example. Let’s say, a commercial property is valued at $1 million, and the outstanding mortgage is $200,000. In this case then your equity in this property is $800,000. Types of commercial equity lines of credit
Although a CELOC is a revolving line of credit, it can be converted into a 5 or 10-year amortized loan after an initial term of a specific number of years.
A commercial equity line of credit works by setting up a preset borrowing limit, offering the same flexibility and security as a CELOC.
The principle on which a commercial equity line of credit works is straightforward. A lender sets up a preset borrowing limit for the commercial real estate owner. The equity in the property acts as collateral.
How much can a property owner expect to borrow? The credit limit LTV (loan-to-value or the lending limit of the line of credit divided by the equity held in the property) is usually in the range of 70-75%.
Repayments are usually made over 5-10 years after the initial revolving term is over. Of course, if you fail to pay at any stage, the lender has the right to seize the collateral to recover its losses.
Loans vs. Lines of credit
There’s a fundamental difference between a commercial real estate loan and a commercial real estate equity line of credit. The former involves a loan disbursal in one lump sum, while the latter provides the borrower with funds as and when needed.
However, that’s not the only difference between a loan and a line of credit. Here are several other ways in which the two are different.
| Commercial real estate loan | Commercial real estate equity line of credit |
| Funds are disbursed once. | Borrow up to a specific limit, repay the money, and then borrow again. |
| Interest is payable on the entire loan amount from the day funds are disbursed. | Pay interest only on the funds that you draw. |
| Fixed repayments based on the rate of interest and the term of the loan. | Repayments are flexible for the revolving term. After that, the facility could be converted into a loan. |
| Typically used for buying equipment or other large-value purchases, although there is usually flexibility in the use of funds. | Funds can be used for most business purposes. Often serves as a business line of credit for real estate investors. |
The primary benefit of a CELOC is that it provides access to cash at short notice. Additionally, you can draw funds when needed and repay as soon as you have any extra liquidity. Lastly, CELOC funds can be particularly useful for property improvements , allowing for renovations that can increase the property’s value and operational efficiency.
Commercial equity line of credit (CELOC) requirements revolve around one essential condition – how much equity can you offer as collateral in your business property? If you fail to repay the borrowed funds, the lender can fall back on this collateral to recover its dues.
At this stage, it’s also essential to consider the types of real estate that can be offered as collateral when applying for a CELOC. Requirements vary by lender, but typically, commercial properties like the following categories are eligible:
The commercial equity line of credit application process can involve several steps:
When deciding on your application, the lender will consider these factors:
Commercial equity line of credit (CELOC) has both its pros and cons, and it’s important to consider them before making a decision.
| Pros | Cons |
| A high degree of flexibility. Borrow as little or as much as you want (subject to the limit of the line of credit). | The flexibility could come at a cost. You may have to pay several types of fees (appraisal fees, late payment fees) that could add to the cost of the loan. |
| It’s an excellent way to meet temporary working capital needs. | Instead of repaying the line of credit, you could be tempted to keep the cash handy, leading to greater interest costs. |
| Funds are available to capitalize on new business opportunities. | Easy access to money may lead to hasty (and unprofitable) business decisions. |
| Interest rates are lower than those available for unsecured loans. | Failure to repay could affect your credit score. |
Commercial equity line of credit can be a good choice in the following scenarios:
CELOCs provide commercial property owners with an excellent way to raise cash. The most significant advantage of this form of borrowing is its flexibility. It permits you to draw funds only when needed and repay when you have extra liquidity. This helps keep interest costs low as you pay interest only for the period you have utilized the funds. Additionally, you have the advantage of having access to capital when you need it most–say, for meeting a working capital shortfall or capitalizing on a promising investment opportunity.
Modified Date & Time : 30 May 2024, 12:29 pm
