Lending on Owner-Occupied Commercial Buildings

Financing owner-occupied commercial buildings presents unique challenges and opportunities, especially when the ownership and operating structures involve entities like S-Corporations and a trustee of a revocable family trust. These arrangements are common among small business owners who seek to optimize tax benefits and asset protection while maintaining control over their business premises.

Introduction

This article explores a real-life lending scenario involving a dentist who operates his practice through an S-Corporation and owns the building through a family trust. It highlights the critical role of the mortgage broker, the lender’s underwriting considerations, and the legal and financial nuances that influence loan approval. By examining this case, readers will gain insight into how lenders evaluate such transactions and what borrowers should expect during the process.

Real-Life Example:

• Overview of ownership structure: two different entities are involved
• Dental Practice business ownership in a corporation
• Business operation through an S-Corporation
• Real estate- property held by a trustee of a revocable family trust

Role of the Mortgage Broker

• Fiduciary responsibility to the borrower
• Acting as an intermediary between borrower and lender

Borrower Profile and Lending Inquiry

• Description of the borrower’s business and ownership
• Initial question: Can the borrower qualify for a loan?
• Questions are typically based on industry standards.

Lender’s Response and Underwriting Considerations

• Appraisal and rent survey process
• Market rent vs. internal rent
• Income verification through personal and corporate tax returns

Trust Ownership and Personal Guarantee

• Implications of holding title in a revocable family trust
• Requirement for personal guarantee
• Risk of a deficiency judgment in foreclosure

Subordination and Lien Position

• Importance of lien Priority
• Subordination agreement for junior loans
• Concerns about tenancy post-foreclosure

Review of First Lien Loan Documents

• Checking for alienation or due-on-encumbrance clauses
• Ensuring compliance with junior lien recording

Conclusion

·        Lending on owner-occupied commercial buildings with layered ownership structures—such as S-Corporations and revocable family trusts—requires careful consideration by both borrowers and lenders. While these arrangements offer tax and estate planning advantages, they introduce complexities in underwriting, appraisal, and legal documentation.

·        Mortgage brokers play a vital role in guiding borrowers through this process, ensuring transparency and alignment with lender requirements. As demonstrated in the case of the dental practice, lenders must evaluate market rent, verify income across entities, and assess the legal implications of trust ownership and corporate tenancy.

·        Understanding these factors can help borrowers prepare for a smoother loan approval process and avoid surprises during underwriting. With proper planning and professional guidance, financing an owner-occupied commercial property can be both feasible and beneficial, offering potential tax and estate planning advantages.

·        Always consult professionals, an Attorney, and a CPA for legal and accounting advice. This professional guidance is crucial for ensuring a secure and well-informed approach to financing an owner-occupied commercial property.