What Type of Documentation Do You Need to Get Approved for a Commercial Purchase or Lease?
Purchasing or leasing commercial property can be an exciting milestone for any business, but the approval process often involves extensive documentation. Whether you’re acquiring a new office space, expanding into an industrial warehouse, or leasing retail space, having the right paperwork in order is crucial. To streamline the process and increase your chances of approval, it’s important to understand what types of documentation are typically required.
In this blog, we’ll break down the essential documents you’ll need to gather to get approved for a commercial property purchase or lease.
1. Financial Documentation
When seeking approval for a commercial lease or purchase, financial stability is one of the most important factors landlords or lenders consider. Here are the key financial documents you will likely need:
- Bank Statements: Most landlords and lenders will ask for bank statements, typically covering the last three to six months, to verify that you have enough funds for a down payment, security deposit, and ongoing expenses.
- Tax Returns: Providing tax returns for the past two to three years is standard. This helps landlords and lenders understand your business’s financial history and profitability.
- Profit and Loss Statements: Lenders or landlords will want to see detailed profit and loss statements (P&L) for your business, which summarize revenue, costs, and expenses. This document shows whether your business is profitable and can afford the monthly payments.
- Balance Sheet: A balance sheet provides a snapshot of your company’s financial position, including assets, liabilities, and equity. This helps lenders assess the overall health of your business and its ability to meet financial obligations.
- Debt and Credit History: Both landlords and lenders will typically request a credit report or ask about your business’s debt obligations to evaluate creditworthiness. Having a good credit score or manageable debt can help secure approval for leasing or financing.
2. Legal Documentation
Various legal documents are required to verify your business’s standing, ownership, and organizational structure. Be prepared to provide the following:
- Articles of Incorporation or Organization: If your business is a corporation or LLC, you’ll need to provide the articles of incorporation or organization to confirm your business’s legal formation.
- Operating Agreement or Bylaws: This document outlines how your business is governed, managed, and structured. For LLCs, an operating agreement may be requested, while corporations typically need to provide bylaws.
- Business Licenses: Ensure that your business licenses are current and valid. Landlords and lenders may require a copy of your licenses to confirm that your business is legally allowed to operate in the industry.
- Personal and Business Identification: Copies of government-issued identification for all key individuals involved in the transaction, such as the business owner or partners, will be required. In addition, the business entity may need to provide a tax identification number (TIN).
- Lease Guarantor Agreement (if applicable): Some landlords may require a personal guarantee or lease guarantor agreement, especially for newer or smaller businesses. This means that an individual—often the business owner—agrees to be responsible for the lease payments if the business cannot meet its obligations.
3. Business Plan or Purpose Statement
Especially for a commercial purchase or if you’re applying for financing, lenders will want to see a clear business plan or purpose statement. This document should outline:
- Business Overview: A description of your company, its industry, and what it does.
- Growth Projections: Details on expected future growth and revenue, which demonstrate that your business will generate enough income to support a property purchase or lease.
- Use of the Property: A detailed explanation of how the commercial property will be used, such as office space, retail operations, warehousing, or production. Lenders and landlords will want to ensure the space is suitable for your intended use and meets zoning regulations.
- Financial Projections: Include projections for income, expenses, and profits for the next few years. This helps demonstrate the viability of your business’s future financial health.
4. Real Estate-Specific Documents
For a commercial property purchase, additional documents will be required as part of the due diligence process:
- Letter of Intent (LOI): For both purchases and leases, an LOI outlines the key terms of the agreement, including pricing, lease duration, or purchase terms. While non-binding, it indicates serious intent and initiates the negotiation process.
- Purchase Agreement (for Buyers): If you’re purchasing a commercial property, you’ll need to provide a purchase agreement, which outlines the terms of the sale. This will include details like the purchase price, contingencies, and closing date.
- Lease Agreement (for Tenants): For those leasing a property, the lease agreement outlines the terms of the lease, including rental amounts, duration, renewal options, and tenant responsibilities. This will need to be reviewed and signed by both the tenant and landlord.
- Environmental Assessments (for Certain Properties): Depending on the type of commercial property, you may need to provide or obtain environmental assessments, especially if the property has been used for industrial purposes or may pose environmental risks.
5. Personal Guarantee or Collateral (for Financing)
If you’re seeking financing for a property purchase, many lenders require additional collateral or a personal guarantee to secure the loan. These documents may include:
- Personal Guarantee: A personal guarantee is often required when the business is new or lacks substantial assets. It means that the business owner personally guarantees the loan, making them responsible for repayments if the business defaults.
- Collateral Documentation: In some cases, the property itself will be used as collateral for the loan, but you may also need to offer other assets as collateral to secure the financing. Lenders will require documentation showing the value of the collateral, such as other real estate holdings, equipment, or personal assets.
6. Insurance Documentation
Before a commercial lease or property purchase is finalized, landlords and lenders will typically require proof of insurance. Depending on the situation, you may need the following:
- Property Insurance: If purchasing, lenders will require that you secure property insurance to protect against loss or damage to the building.
- Liability Insurance: Whether leasing or buying, commercial landlords typically require tenants to carry liability insurance. This protects both parties in case of accidents, injuries, or property damage that occur on the premises.
- Business Interruption Insurance: Some landlords may require this coverage, which protects your business in case operations are disrupted due to unforeseen events like natural disasters.
Conclusion
Gathering the right documentation is an essential step in getting approved for a commercial property lease or purchase. From financial statements and legal documents to a clear business plan and proof of insurance, having everything prepared can help you avoid delays and improve your chances of approval. Working with a knowledgeable commercial real estate broker can also help ensure you have everything in order and guide you through the process smoothly.
By being prepared with all the necessary documents, you’ll be one step closer to securing the perfect commercial space for your business, whether you’re buying or leasing.
