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Commercial real estate loan requirements: A Full Guide

If you’re looking to invest in commercial real estate, securing financing is one of the most important steps you’ll need to take. Commercial real estate loans can be complex, and the requirements can vary depending on several factors, including the type of property you’re looking to purchase, credit history, income the property generates, and the lender you’re working with.  There is in fact a laundry list of items, but understanding the ins and outs of commercial real estate loan requirements is critical to ensuring the ability to capitalize your investment successfully.

This full guide will provide you with everything you need to know about commercial real estate loan requirements. We’ll cover the different types of loans available, the factors that lenders consider when evaluating your application, and the steps you can take to improve your chances of getting approved. 

Whether you’re a seasoned real estate investor or just starting, this guide will provide the information you need to navigate the complex world of commercial real estate financing. So, let’s dive in!

Commercial real estate loan requirements

Types of Commercial Real Estate Loans

Traditional Mortgages

A traditional mortgage is a long-term loan used to purchase commercial real estate. Banks, credit unions, and other traditional lenders typically offer these loans, and they have fixed or adjustable interest rates. 

Traditional mortgages are secured by the purchased property, meaning that if the borrower defaults on the loan, the lender can seize the property to recoup their losses. The loan amount, interest rate, and repayment terms will depend on the borrower’s credit score, income, and the property’s value.

SBA 504 Loans

SBA 504 loans are commercial real estate loans partially guaranteed by the Small Business Administration (SBA). Banks and other traditional lenders typically offer these loans, and they are designed to help small businesses purchase or refinance commercial real estate. 

SBA loans offer longer repayment terms and lower interest rates than traditional mortgages, and they are available to borrowers who might not qualify for traditional financing. However, SBA loans can be more difficult to obtain than traditional mortgages, requiring extensive documentation and a detailed application process.

Bridge Loans

Bridge loans are short-term loans used to finance commercial real estate projects that require quick funding. Private lenders typically offer these loans, and they have high-interest rates and shorter repayment terms than traditional mortgages or SBA loans. 

Bridge loans are typically used to bridge the gap between the purchase of a property and the sale of another property or to finance the renovation or construction of a commercial property. These loans are designed to be repaid quickly, usually within a few months to a few years, and they are secured by the property being purchased or renovated. 

Because bridge loans are riskier than traditional mortgages or SBA loans, they are typically only offered to borrowers with strong credit scores and a track record of successful real estate investments.

Property Types

When it comes to commercial real estate loans, the type of property financed can significantly impact the loan requirements. Here’s a more detailed explanation of the different types of commercial properties and how they can affect loan requirements:

Retail Properties

Retail properties are commercial properties used for selling goods and services to consumers. This can include storefronts, shopping centers, and other retail spaces. Because retail properties are considered high-risk investments, lenders typically require higher down payments and stricter underwriting standards. This is because the success of a retail property is largely dependent on the success of the businesses that occupy the space, and if those businesses fail, the property may lose value.

Office Properties

Office properties are commercial properties used for professional services, such as law firms, accounting firms, and other businesses. These properties are generally considered lower-risk investments than retail properties, as they tend to have longer-term leases and lower vacancy rates. Lenders may require lower down payments and have more flexible underwriting standards for office properties.

Industrial Properties

Industrial properties are commercial properties used for manufacturing, warehousing, and distribution. These properties can include warehouses, factories, and storage facilities. Because industrial properties are considered higher-risk investments than office properties, lenders may require higher down payments and stricter underwriting standards. However, because these properties often have long-term leases with established tenants, they can be attractive investments for lenders and investors.

Multi-Family Properties

Multi-family properties are commercial properties that consist of multiple residential units, such as apartment buildings or condominium complexes. These properties are considered lower-risk investments, as they tend to have stable, long-term cash flows. Lenders may require lower down payments and more flexible underwriting standards for multi-family properties, especially if the property has a strong rental history.

In summary, the type of property being financed can impact loan requirements regarding the down payment, underwriting standards, and interest rates. Retail and industrial properties are generally considered higher-risk investments, while office and multi-family properties are considered lower-risk investments. 

However, every lender and loan application is unique, and the loan requirements can vary depending on various factors, such as the borrower’s credit history and income, the property’s location and value, and the current market conditions.

commercial loan requirements

Loan-to-Value Ratio

The Loan-to-Value (LTV) ratio is an important factor that lenders consider when evaluating commercial real estate loan applications. The LTV ratio is the ratio of the loan amount to the appraised value of the purchased property. For example, if a borrower seeks a $500,000 loan to purchase a property appraised at $1 million, the LTV ratio would be 50%.

Lenders use the LTV ratio to determine the level of risk associated with a loan. A higher LTV ratio means the borrower is borrowing a larger percentage of the property’s value, which increases the risk for the lender. As a result, lenders may require a higher down payment or charge a higher interest rate for loans with higher LTV ratios.

Lenders generally prefer to see lower LTV ratios for commercial real estate loans. A common benchmark for commercial real estate loans is an LTV ratio of 80% or lower. This means the borrower is putting down at least 20% of the property’s value as a down payment.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is another important factor that lenders use to evaluate commercial real estate loan applications. DSCR measures a property’s ability to generate sufficient income to cover its debt obligations. A DSCR of 1.0 means that the property’s income equals its debt obligations. A DSCR higher than 1.0 indicates that the property generates enough income to cover its debt obligations, while a DSCR lower than 1.0 indicates that the property does not generate enough income to cover its debt obligations.

Lenders typically require a minimum DSCR of 1.25 to 1.35 for commercial real estate loans. This means that the property’s income must be 1.25 to 1.35 times the annual debt service amount. A higher DSCR can help borrowers secure better loan terms and lower interest rates, as it indicates that the property has a strong income stream and is less risky for the lender.

requirements for commercial loan

Credit History

The borrower’s credit history, whether that is personal or corporate, is an important factor that lenders consider when evaluating commercial real estate loan applications. Lenders will typically review the borrower’s or companies financial statements, credit score, credit report, and other credit-related factors, such as payment history and outstanding debts. A good credit history can help borrowers secure better loan terms and lower interest rates, while a poor credit history can make it more difficult to qualify for a loan or result in higher interest rates.

Income and Cash Flow

Lenders also consider the income and cash flow of the borrower and the property being purchased when evaluating commercial real estate loan applications. This includes the borrower’s personal income and the property’s rental income or other sources of cash flow. Lenders will typically review the borrower’s tax returns, bank statements, and other financial documents to verify income and cash flow. A strong income and cash flow can help borrowers secure better loan terms and lower interest rates, as it indicates that the borrower is less risky and has the ability to repay the loan.

Commercial Real Estate Loan Application Process

The commercial real estate loan application process can be complex and may require extensive documentation. In general, lenders will require the following documents:

  • Personal and business financial statements
  • Income tax returns
  • Property appraisal report
  • Rent roll and operating statements (for income-generating properties)
  • Business plan (for new properties or business ventures)

Once the loan application is submitted, the lender will typically assign an underwriter to review the application and assess the borrower’s creditworthiness and the property’s value and potential. The underwriter will review the borrower’s credit history, income, cash flow, and the property’s appraisal and other financial documents. The underwriter may also request a tour of the property.  Additional documentation or clarification during the review process may be required.

If the loan application is approved, the lender will typically order an appraisal of the property to verify its value. The appraiser will evaluate the property and provide a report that includes the property’s estimated value and other relevant details.

The commercial real estate loan application process can be complex and may require extensive documentation. Factors such as the DSCR, credit history, income, and the property’s appraised value will all come into play in determining loan eligibility and terms of the mortgage.

Conclusion

In conclusion, securing a commercial real estate loan can be complex, and understanding the various loan requirements is critical to ensuring that your investment is successful. As we’ve discussed in this guide, factors such as the loan-to-value ratio, debt service coverage ratio, credit history, income and cash flow, and the commercial real estate loan application process all play a role in determining loan eligibility and interest rates.

At Point Acquisitions, we understand the unique challenges of commercial real estate investing and have the expertise to help guide you through the process. If you’re a commercial real estate professional or interested in selling a commercial property, we encourage you to contact us to discuss your needs and learn how we can help. Our team of experts has years of experience in commercial real estate and can provide you with the insights and support you need to make informed investment decisions and achieve your financial goals.

So don’t hesitate to reach out to Point Acquisitions today to learn more about our services and how we can help you succeed in commercial real estate. We look forward to hearing from you!

About The Author

Jesse Shemesh

With a wealth of experience in nurturing diverse commercial real estate investment portfolios across multiple markets, I actively engage in the development and execution of deals spanning all asset classes. My expertise lies in collaborating with strategic partners, including corporate real estate professionals, fund managers, developers, and investors, to source, identify, and entitle opportunities. At Point Acquisitions, we take pride in our unique, proprietary platform that specializes in property acquisitions, generating a steady stream of organic deal flow that sets us apart from the competition. As a seasoned professional in the real estate industry, I am dedicated to creating lasting partnerships and delivering exceptional results for all stakeholders.

Disclaimer

Please note that Point Acquisitions is not a tax expert or tax advisor. The information on our blogs and pages is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Any information provided does not constitute professional advice or create an attorney-client or any other professional relationship. We recommend that you consult with your tax advisor or seek professional advice before making any decisions based on the information provided on our blogs and pages. Point Acquisitions is not responsible for any actions taken based on the information provided on our blogs and pages.

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