How Can CRE Investors Profit From US Government Programs?

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Ask any real estate investor about opportunities in the sector and you’ll be greeted with favorable answers. If you’re looking to invest in residential real estate, it might be a bit easier as a beginner. However, commercial real estate is complex and you always need to stay updated with current market dynamics. Investment is another aspect that you need to focus on in commercial estate while ensuring there’s a solution for your financing needs.

What most commercial real estate (CRE) investors don’t know is that there are several US government programs that can help you fund your projects. Although some experienced investors know about these, they are a well-kept secret. This is why we feel this article might be what you need to get ahead of the competition. Here, we discuss the different funding options CRE investors have and the several government programs you can take advantage of.

So, what are you waiting for? Jump right into it and get started with your CRE investment career!

Top Funding Options for CRE Investors

CRE investment is completely dependent on funding as it can solve an array of needs like purchasing, leasing, and renovating the property. However, the current market dynamics have made it a bit difficult for investors to seek proper financing. The following section discusses a wide variety of funding options that you can choose from to fund your commercial real estate project.

Mortgage Loan

One of the most well-known financing options, mortgage loans are usually offered by banks. We recommend checking with at least a few banks for more information on their interest rates. Choose a bank that offers a loan at an affordable interest rate for the best possible deal. Some other aspects other than the interest rate that request your attention include:-

  • Loan-To-Value Ratio – Often, banks might not finance the total value of the property. Although you can expect banks to finance 75% to 100% (based on several factors), you should be prepared to meet the shortfall (if any). You should always look for a higher loan-to-value ratio to ensure you’re left with more money for future investments or project adjustments.
  • Amortization Term – In simple terms, this refers to the total period over which the loan is repaid to the bank. Generally, the amortization term can vary anywhere between 10 and 25 years for commercial properties. A higher amortization period can help you save more liquid cash that you can use for further growth.
  • Flexibility – Sometimes, banks offer a holiday period of 1-2 years where they do not charge any interest from the borrower. This can help you get additional money or further reduce the principal amount.

Working Capital Loan

Provided by banks and Non-Banking Financial Companies (NBFCs), working capital loans are offered for shorter durations compared to mortgage loans. Most CRE investors use these loans to fund property renovations and the company’s growth. For example, if your company needs to move to a larger space immediately, a working capital loan can help. On the other hand, if the current market demands you to make sustainable shifts in your property, the loan can help with purchases.

Leasehold Improvement Plan

As evident from the name, a leasehold improvement plan is mostly utilized for property renovations and improvements. These are also taken by the borrower for shorter durations and might offer greater flexibility. Sometimes, the projected value of your investment might be quite promising. This might be enough to convince the bank to use it as collateral and offer a lowered interest rate compared to an unsecured loan.

Equipment Loan

With the recently increased focus on sustainability, it is common for borrowers to ask for an equipment loan. These loans help borrowers purchase new equipment that acts as the loan collateral too. Generally, the loan period stretches over the life of the equipment (approximately 5 to 12 years). Moreover, an equipment loan requires lesser and simpler documentation and can help CRE investors secure financing in no time. An added advantage is that borrowers can save on the upfront expense that goes into buying new equipment.

Demand Loan

Often a confusing concept for beginners, a demand loan is demanded to fulfill the borrower’s immediate business needs. This might include renovations, equipment purchases, and much more. There’s no fixed maturity date on these types of loans meaning there’s a huge scope of flexibility for the borrower’s convenience. However, the lender can ask the borrower to repay the loan in full or in part at any time. Borrowers might also choose to repay the entire amount or a part of it as they deem fit and avoid penalties.

Line of Credit

In case you need financing at regular intervals, a Line of Credit might be the perfect option. Generally, the borrower can apply for a loan of any particular amount from the bank. However, it is up to them whether they want to withdraw the money in full or in part. The best part about this loan is that the rate of interest is only applicable to the withdrawn amount and not the total amount.

Vendor Financing

An unpopular financing method, vendor financing is a short-term loan offered by a company or an organization. Generally, the lender does this to allow the borrower to purchase services or products from them. For example, an equipment company might finance your project because you need new equipment for renovation. In turn, you offer them some company shares or promise to pay them back at high-interest rates.

US Government Incentives for CRE Investors

Now that we know about the different financing methods available, let’s talk about the available US government incentives. Although not many people know about these, they can be instrumental to your projects and help your business as a whole. Capitalize on these US Government incentives and build your commercial real estate portfolio:-

Job Credits

These types of incentives are based on the number and type of jobs that your project will create. The higher the number of jobs and the better the pay, the better the incentives that you can enjoy. Common types of Job Credit incentives available include:-

  • Local and State Level Credits
  • Payroll Tax Credits

Real Estate Tax Abatement

These types of incentives help reduce real estate taxes for increased property values over a specific period. In simple terms, the overall tax is reduced by the government to help boost economic growth and activity in the area. Although the time period varies from jurisdiction to jurisdiction, these can be quite helpful in saving money that you can reinvest in future projects. Some common types of incentives under real estate tax abatement are:-

  • Municipal Tax Abatement
  • Property Tax Abatement

Capital Improvement Projects (CIPs)

If the government thinks that the community might benefit from your project, they might offer economic incentives. These types of projects are called Capital Improvement Projects (CIPs) and can help the government achieve its set goals. For example, a local community might benefit from better public transport and public roads. The local government will try to find a business that offers these services and provide incentives.

Discretionary Incentives

Generally offered to development and expansion projects, discretionary incentives are meant as above-the-line savings/commercial grants. These might include sales, property taxes, or personal income rebates/abatement.

Brownfield Incentives

A collection of funding sources, Brownfield incentives are meant to help plan, assess, and remediate brownfields. But, what exactly are these brownfields? Well, these are underutilized properties where environmental contaminants might be present. Projects that focus on revitalizing certain city areas to make them more habitable are called brownfield development projects. This incentive category applies to these projects and can help investors save a lot of money.

Tax Increment Financing

Generally used as a subsidy, tax increment financing is a public financing method that allows the government to invest in projects for public infrastructure development and other improvements upfront.

Energy Efficiency Incentives

Nowadays, more and more people are looking to purchase, lease, or rent properties that consume energy efficiently. Businesses that make energy-saving upgrades with equipment for heating, lighting, and cooling are eligible for these government incentives. The most popular energy-efficient incentive available is PACE which offers benefits to energy-efficient commercial properties.

Historic Preservation Tax Credit Program         

Businesses that take advantage of private redevelopment of historic properties are eligible for incentives under the Historic Preservation Tax Credit Program. With more and more cities looking to preserve their history and revitalize old properties, this incentive category is becoming extremely popular.

Health Incentives and COVID-19 Programs

The pandemic has shown us that life is very unsure and we need to be prepared for every situation that comes our way. These health incentives and COVID-19 programs offer businesses to take small steps for the better handling of diseases and health crises with an incentive.

Conclusion

With the wide range of US Government programs and incentives available, we’re pretty sure that you will easily find an economic policy that supports you. When utilized properly, these programs can help you maximize your savings, generate higher profits, and minimize losses. You might also receive additional support from the government if you’re eligible for any of these schemes.

So, what are you waiting for? Get in touch with an experienced real estate agency and find a government program suited to your project!

Want to learn more? Get in touch with us today.

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