Owner-Occupied Properties
In most cases, an owner-occupied commercial real estate consists of two primary elements:
(1) real estate value
(2) business value.
Owner-occupied properties will be valued based on its ability to generate income under a renting scenario. This procedure provides insight to the projected value of the real estate, and its ability to generate rental income, should it be leased to a tenant other than the owner-occupant; as what could be the case in the event of a foreclosure or if the owner-occupant business closes.
Once a determination of the real estate lending value is made, the lender will then analyze the owner-occupant’s business to ascertain whether the business generates sufficient income to service the proposed debt. Therefore, the lender is assured that the debt service can be covered under both scenarios.
The primary way to determine the real estate owner-occupied properties includes an the property’s ability to generate income under a “market rent” scenario-as if the owner-occupant was not the tenant and the space was leased to a non-owner tenant.
To complete the following it must be known:
1. Estimated Market Rent for the owner-occupied space(s).
2. Typical lease structure for the owner-occupied space(s).
3. Average lease term (that is customary for the respective market).
4. Items paid by lessee (tenant) vs. lessor (landlord).
Take-away Advice
You must be able to convince the lender that the business will succeed and make enough income to service the proposed debt.