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Types of Commercial Real Estate Loans

When purchasing or developing commercial real estate, finding the right financing solution can be a critical piece of the puzzle. A variety of loan options are available, each with advantages and disadvantages depending on your unique business needs and financial situation. In this article, we’ll explore the most common types of commercial real estate loans, including traditional bank loans, SBA loans, bridge loans, CMBS loans, and hard money loans.

We’ll break down the pros and cons of each type of loan and offer guidance on how to choose the best financing solution for your specific needs. Whether you’re looking to invest in a commercial property or fund a new development project, understanding your options is crucial to making informed decisions and achieving success in commercial real estate.

types of commercial loans

What is a commercial real estate loan?

A commercial real estate loan is financing specifically designed for business purposes, such as purchasing or renovating commercial properties, constructing new buildings, or refinancing existing commercial properties. These loans are typically issued by banks, credit unions, or specialized lenders and come in various forms, including traditional term loans, SBA loans, bridge loans, CMBS loans, and hard money loans. 

Commercial real estate loans are secured by the property itself, which means that the lender has the right to take ownership of the property if the borrower defaults on the loan. The terms and interest rates for these loans can vary widely depending on the lender, the type of loan, and the borrower’s creditworthiness and financial situation. Because of the large amounts of money involved and the potential risks, lenders typically require extensive documentation and collateral to secure commercial real estate loans.

How do commercial property mortgages work?

Commercial property mortgages work similarly to residential mortgages, but some key differences exist. In a commercial mortgage, a lender loans a business or individual to purchase or refinance a commercial property. The loan is secured by the property itself, which means that the lender has the right to take ownership of the property if the borrower defaults on the loan.

The terms of a commercial mortgage can vary widely depending on the lender, the borrower’s financial situation, and the specific property being financed. Commercial mortgages typically have higher interest rates and require larger down payments than residential mortgages, reflecting the higher risk and larger amounts of money involved in commercial real estate.

The loan term for a commercial mortgage is typically shorter than a residential mortgage, with most loans having terms ranging from 5 to 20 years. At the end of the loan term, the borrower will either need to pay off the remaining balance or refinance the loan.

One key difference between commercial and residential mortgages is how the loan is underwritten. In a residential mortgage, the borrower’s credit score and income are the primary factors in determining whether the loan will be approved. In a commercial mortgage, the lender will also consider the income and financial performance of the financed property and the borrower’s creditworthiness.

What is the difference between commercial and residential real estate loans?

While commercial real estate and residential loans are used to purchase property, there are several key differences between the two. One of the main differences is the purpose of the loan. Commercial real estate loans are designed for businesses or individuals looking to purchase or refinance commercial properties, such as office buildings, retail spaces, and warehouses. In contrast, residential loans purchase homes or other residential properties.

Another key difference is the underwriting process. In a residential loan, the borrower’s personal credit score, income, and debt-to-income ratio are the primary factors in determining whether the loan will be approved. In a commercial loan, the lender will also consider the income and financial performance of the financed property and the borrower’s creditworthiness.

The terms of the loan also differ. Commercial real estate loans generally have shorter repayment terms and higher interest rates than residential loans, reflecting the higher risk and larger amounts of money involved in commercial real estate. Commercial loans typically require larger down payments and more extensive documentation and collateral to secure the loan.

While both types of loans are used to purchase property, commercial real estate loans are specifically designed for businesses or individuals looking to invest in commercial real estate and require a different underwriting process and loan terms than residential loans.

types commercial real estate loans

What is the difference between commercial real estate loans for individuals vs. entities?

When it comes to commercial real estate loans, there are two main types: those that individuals take out and those that are taken out by entities such as LLCs or corporations. The main difference between these two types of loans is how they are underwritten and how the lender assesses risk.

Individuals seeking a commercial real estate loan will need to provide extensive documentation of their finances, including income, credit score, and personal assets. The lender will evaluate the borrower’s creditworthiness based on these factors and the specific property being financed. In contrast, commercial loans taken out by entities are underwritten based on the financial performance of the business and the property itself rather than the borrower’s personal finances.

Another key difference is the structure of the loan. Loans taken out by individuals are typically structured as recourse loans, meaning that the borrower is personally liable for repaying the loan and can be held personally responsible if the loan is not repaid. In contrast, loans taken out by entities are structured as non-recourse loans, meaning that the lender’s only recourse in the event of a default is to take possession of the property itself.

While individuals and entities can take out commercial real estate loans, the underwriting process and loan structure can differ significantly depending on who borrows the money. By understanding these differences, borrowers can make informed decisions about the type of loan best suits their needs.

Choosing the right commercial real estate loan for your business needs

Choosing the right commercial real estate loan is crucial for any business owner looking to purchase or refinance commercial property. Various loan options are available, each with its advantages and disadvantages, so it’s important to consider several factors before deciding on a loan.

One of the first factors to consider is the type of financed property. Different types of commercial real estate loans are better suited to different properties, so choosing a loan tailored to the property’s specific needs is important. For example, a bridge loan might be a good option for a property that needs significant renovations or upgrades. In contrast, a traditional term loan might be more appropriate for a stable, income-generating property.

Another factor to consider is the loan structure. Some loans, such as SBA loans, offer longer repayment terms and lower interest rates but require more extensive documentation and collateral to secure the loan. Other loans, such as hard money loans, offer shorter repayment terms and higher interest rates but require less documentation and collateral.

Creditworthiness and financial stability are important considerations when choosing a commercial real estate loan. Lenders will evaluate a borrower’s credit score, income, and debt-to-income ratio, as well as the financial performance of the financed property, to determine whether to approve the loan and what terms to offer.

Choosing the right commercial real estate loan requires careful consideration of various factors, including the type of property being financed, the loan structure, and the borrower’s creditworthiness and financial stability. By evaluating these factors and shopping for the best loan, business owners can find the financing they need to grow and succeed.

SBA Loans for Commercial Real Estate

SBA loans are a popular financing option for small businesses that need to purchase or refinance commercial real estate. The U.S. Small Business Administration offers two loan programs to help small businesses access affordable financing, including the SBA 7(a) loan program and the SBA 504 loan program.

SBA 7(a) loans can be used for various business purposes, including commercial real estate. Business owners can use these loans to purchase, refinance, or renovate commercial property and finance working capital, equipment, and other business expenses. The maximum loan amount is $5 million, and the repayment term can be up to 25 years for real estate loans.

The SBA 504 loan program is specifically designed for businesses looking to purchase owner-occupied commercial real estate. These loans are structured as a partnership between the SBA, a Certified Development Company (CDC), and the borrower. The CDC provides a portion of the financing, while the SBA guarantees a portion of the loan. The borrower is required to provide a down payment of at least 10% of the total project cost, and the repayment term can be up to 25 years for real estate loans.

SBA loans offer several advantages, including lower interest rates and longer repayment terms than commercial real estate loans. However, the application process can be more complex and time-consuming than other types of loans, and borrowers must meet certain qualifications to be eligible for these loans.

Overall, SBA loans are an excellent financing option for small businesses looking to purchase or refinance commercial real estate. By working with a lender who specializes in SBA lending, business owners can access the affordable financing they need to grow and succeed.

Bridge Loans for Commercial Real Estate

Bridge loans are short-term financing that can bridge the gap between the purchase of a new property and the sale of an existing property. Commercial real estate transactions often use these loans to fund purchasing a new property before the borrower has sold their current property.

Private lenders typically offer bridge loans and have higher interest rates and fees than traditional bank loans. The loan amount is based on the value of the property being used as collateral, and borrowers are often required to have a significant amount of equity in their existing property. The repayment term for a bridge loan is typically shorter, ranging from a few months to a few years.

Bridge loans can be a good option for commercial real estate investors who need short-term financing to take advantage of a time-sensitive opportunity or to fund a renovation project. These loans can be used to purchase new properties, renovate existing properties, or refinance existing debt.

One of the main advantages of bridge loans is their quick turnaround time. Private lenders can process these loans quickly, which can be critical in a competitive real estate market. Additionally, bridge loans can offer greater flexibility than traditional bank loans, as they are often based on the value of the property rather than the borrower’s credit score or financial history.

Overall, bridge loans can be a valuable financing option for commercial real estate investors who need short-term funding to capitalize on opportunities or complete projects. However, borrowers should carefully consider the terms and fees of these loans and work with a reputable lender to ensure they get a fair deal.

CMBS Loans

A Commercial Mortgage-Backed Security (CMBS) loan is a type of commercial real estate loan pooled together with other loans to create a security that can be sold to investors in the secondary market. This type of loan is typically used to finance large commercial properties, such as office buildings, shopping centers, and hotels.

Commercial mortgage lenders originate CMBS loans. Then the loans are pooled together into a trust, which issues bonds sold to investors. The investors receive a share of the borrower’s principal and interest payments on the underlying loans. The trust that issues the bonds is typically structured with different classes of bonds, each with a different level of risk and return.

CMBS loans offer several advantages for borrowers, including competitive interest rates and longer repayment terms than traditional bank loans. Because the loans are pooled together and sold to investors, the lender can reduce its risk and offer more favorable terms to borrowers. Additionally, CMBS loans are non-recourse, meaning the borrower is not personally liable for the debt.

However, CMBS loans can also have some drawbacks. Borrowers may face stricter underwriting requirements than with traditional bank loans, and the loans can be more difficult to modify or refinance in the future. Additionally, CMBS loans can be impacted by changes in the economy or financial markets, leading to higher interest rates or a reduced appetite for these types of investments.

CMBS loans can be a good financing option for commercial real estate investors looking to finance large properties. However, borrowers should carefully consider the terms and risks of these loans and work with a reputable lender to ensure they get a fair deal.

commercial real estate loan types

Comparing Fixed vs. Variable Rate Commercial Real Estate Loans

Regarding commercial real estate loans, borrowers can choose between fixed-rate and variable-rate options. A fixed-rate loan offers a consistent interest rate throughout the life of the loan, providing borrowers with stability and predictability. In contrast, a variable-rate loan can offer lower initial interest rates. However, it may fluctuate over time based on market conditions.

Fixed-rate loans can be a good option for borrowers who want to lock in a stable interest rate and avoid the risk of rising rates in the future. These loans can also make it easier to budget for monthly payments and plan for the long-term financial health of the business.

Variable-rate loans, on the other hand, can be a good option for borrowers who are comfortable taking on some level of interest-rate risk. These loans can offer lower initial interest rates and may be a good choice in a low-interest-rate environment. However, borrowers should be prepared for the possibility of rising rates in the future and plan accordingly.

Ultimately, the choice between a fixed-rate and variable-rate commercial real estate loan will depend on the borrower’s specific needs and circumstances. By understanding the pros and cons of each option, borrowers can make an informed decision that aligns with their financial goals and risk tolerance.

Final Thoughts

Commercial real estate loans are valuable for businesses looking to purchase or refinance property. Whether you’re looking for a traditional bank loan, an SBA loan, a bridge loan, or a CMBS loan, it’s important to carefully consider your options and choose the right loan for your specific needs and circumstances.

By working with a trusted lender, evaluating the risks and benefits of each loan type, and creating a solid plan for repayment and property management, you can take advantage of the many benefits that commercial real estate loans offer. With careful planning and a clear understanding of the loan process, you can secure the financing you need to take your business to the next level and achieve your long-term goals.

Contact us today at Point Acquisitions to learn more about the commercial real estate loan process and how we can help you find the best financing solution for your unique needs. Our experienced team of real estate professionals is here to guide you through every step of the loan process and ensure that you get a fair deal. We look forward to helping you achieve your dreams!

Frequently Asked Questions

What is a commercial real estate loan?

A commercial real estate loan is a type of financing used to purchase or refinance commercial property. These loans can be used for various properties, including office buildings, retail spaces, and warehouses.

What are the different types of commercial real estate loans?

There are several commercial real estate loans, including traditional bank loans, SBA loans, bridge loans, and CMBS loans. Each loan type has its own pros and cons, and the right option will depend on the borrower’s specific needs and circumstances.

What are the advantages of commercial real estate loans?

Commercial real estate loans can provide businesses with the financing they need to purchase or refinance the property, helping them to grow and expand. These loans can also offer favorable interest rates and flexible repayment terms, making them a popular choice for commercial real estate investors.

How do I qualify for a commercial real estate loan?

Qualifying for a commercial real estate loan typically requires a strong credit score, a solid financial history, and a clear business plan. Lenders will also evaluate the purchased property, looking at location, condition, and potential income.

What are the risks associated with commercial real estate loans?

Commercial real estate loans come with certain risks, including the possibility of rising interest rates, changes in property value, and potential tenant defaults. Borrowers should carefully evaluate these risks and create a plan to mitigate them before taking on a commercial real estate loan.

How can I choose the right commercial real estate loan for my needs?

To choose the right commercial real estate loan, borrowers should consider interest rates, repayment terms, and underwriting requirements. Working with a trusted lender who can provide guidance and support throughout the loan process can also be helpful.

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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