Table of Contents
Commercial real estate loans are a type of loan that is used to purchase or finance commercial properties. The types of commercial real estate loans include construction loans, permanent financing, and mezzanine financing.
A commercial real estate loan is a loan from a bank or other financial institution that is used to buy, develop, or repair commercial real estate. Commercial real estate comprises office spaces, warehouses, storefronts, and production facilities, as well as property utilized for commercial purposes.
Commercial real estate loans are divided into five categories:
- SBA 7(a) loan: For long-term commercial real estate loans up to $5 million, this is the best option.
- SBA 504: Commercial real estate loans up to $14 million are available under the SBA 504 loan program.
- Conventional mortgages: Commercial real estate loans with no limit loan amount are referred to as conventional mortgages.
- Commercial bridge loan: Financing for commercial real estate that is only needed for a short period of time.
- Commercial hard money loan: An alternative for short-term refurbishment funding for those with bad credit.
When a commercial real estate loan is made, a commercial mortgage is filed to protect the lender in the event that the borrower fails on the loan. Fully amortizing commercial mortgages feature monthly principle and interest payments and are paid off at the end of the term. Other types of loans include interest-only loans with a balloon payment at the end of the period.
Check out Lendio if you’re searching for a marketplace that offers both SBA and regular mortgage loans. Lendio’s marketplace, which has over 75 lenders, will help you shop your application for the best rates and terms. Before you start the application process, be sure to read our advice on how to acquire a small business loan.
Comparing Commercial Real Estate Loans
1. SBA 7(a) Loan
Because of their low rates, Small Business Administration (SBA) 7(a) loans are a fantastic alternative for commercial real estate financing. Because of the SBA guarantee, rates for SBA loans are lower. There are various regulations related to SBA 7(a) loans.
With an SBA &(a) loan, you can get financing of up to $5 million for up to 25 years. Another advantage over a conventional mortgage is that you can go up to 90% loan to value (LTV), reducing the amount of capital needed for a down payment.
For loans with a period of 15 years or more, there is a prepayment penalty. You must pay a prepayment charge if you pay off more than 25% of your loan in the first three years. The fee applied on the prepaid amount begins at 5% in the first year and gradually decreases to 1% in the third year.
Despite the prepayment penalty, SBA 7(a) loans are great long-term loans for buy-and-hold investors due to the excellent rates available.
SmartBiz is an excellent SBA 7(a) loan provider. You may be prequalified without affecting your credit score by entering your information on SmartBiz’s website.
2. SBA 504 Loan
An SBA 504 loan is a two-part loan that closes at the same time. One is from a typical lender, while the other is from a community development company, which is a nonprofit lender (CDC). With an SBA 504 loan, you may borrow up to $14 million for up to 25 years. An SBA 504 loan, like an SBA 7(a) loan, may have a maximum loan-to-value (LTV) of 90%, lowering the needed down payment.
The SBA 504 loan, like other SBA loans, has extremely strict conditions. Please read our guide to SBA 504 loans before applying. When seeking an SBA 504 loan, there are three fundamental considerations to bear in mind:
- The property must be inhabited by the owner.
- It is necessary to generate jobs.
- A company’s net value must be less than $15 million.
An SBA 504 loan is suitable for a developing firm that may not have the resources to make a substantial down payment on commercial real estate due to the low down payment. It’s also beneficial for companies that aren’t in a rush to close on a property, since it may take up to two months (and often more) to do so.
3. A traditional commercial loan
A typical commercial mortgage loan is issued by a bank or lending institution and is not guaranteed by the federal government. It may be used to buy or refinance commercial assets such owner-occupied office buildings, retail malls, shopping centers, industrial warehouses, and other commercial properties.
The benefit of a conventional commercial mortgage over an SBA loan is that it does not have a limit loan amount, making it perfect for big commercial real estate acquisitions or blanket mortgage loans.
Because these loans might be big and aren’t insured by the government, the conditions are more stringent. Some lenders may demand you to have been in the company for up to five years and have a minimum credit score of 700. The financial and credit conditions will almost certainly be more strict the higher the loan sought.
Traditional commercial real estate loans are available from U.S. banks in a variety of forms. You may start the application process online or by scheduling an appointment with a U.S. Bank branch or mortgage office near you.
4. Bridge Loan
A commercial bridge loan is a short-term loan used to acquire commercial real estate with additional cash to renovate it. Commercial bridge loans aren’t meant to be long-term investments. Borrowers that are unable to get permanent funding might also employ commercial bridging loans. Unlike permanent finance, which uses the loan-to-value (LTV) ratio to determine funding, commercial bridge loans use the loan-to-cost (LTC) ratio or after-repair-value to determine funding (ARV). Commercial bridge loans carry additional risk for the lender since they are predicated on future values, which frequently implies a higher interest rate than permanent financing.
Lenders will assess a property’s existing condition, rehabilitation plans, and market circumstances before authorizing a project. You’ll also be more likely to get accepted for a business bridge loan if you have property improvement expertise. Bridge loans for businesses are often utilized in the same manner that construction loans are.
Commercial bridge loans of up to $25 million are available from AVANA Capital with a turnaround time of less than two months. Although you cannot apply directly via AVANA Capital’s website, you may submit a bridge loan request and a representative will contact you.
5. Hard Money Commercial Loan
Hard money loans are short-term commercial real estate loans that range from one to four years in length. Hard money loans are often employed by firms who are unable to get finance from standard lenders owing to credit concerns or properties that are in poor condition. Because of the high-interest rates and costs, they are considered last-resort mortgage finance.
Hard money lenders have the benefit of fast financing timelines, with loans being funded in as little as a few days. However, costs may be rather substantial, and practically every other sort of commercial real estate financing has lower interest rates.
Kiavi is the greatest hard money lender in our opinion. Kiavi is a good choice for a hard money loan because of its quick funding times, lack of hidden fees, and lack of a personal income qualification. Kiavi finances 12-month hard money loans up to $3 million. Flippers with a lot of experience (five or more flips in the last 24 months) may earn higher rates and a personal manager.
Conclusion
When looking for a commercial real estate loan, think about the sort of property you want to buy and if you want to maintain it long-term or sell it for a profit after you renovate it.
Each sort of commercial real estate has its own set of applications that are best suited to certain business ventures. CREs funded by the government will have cheaper lending rates but more complex restrictions. Traditional commercial real estate loans have lower interest rates and simpler conditions.
Before getting a commercial real estate loan, be sure to weigh all considerations, including interest rates, fees, and term lengths.
