Types of Commercial Real Estate Loan and Lenders

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Commercial real estate usually refers to an income-generating property that can be used for business. It can include apartments, hotels, retail outlets, and even offices.

What is a Commercial Loan?

A commercial real estate loan is a mortgage that can be availed using commercial property as security. These loans can be classified into three broad categories – loan for business, borrowing for investment, and loan for development. In this article, we will examine the different types of commercial loans and their lenders.

Types of Commercial Loans

Real-estate loans can never be one-size-fits-all. Every borrower may have his own requirement, and the property for which the loan is availed can also differ. There are several commercial real estate mortgages with different rates, terms, and uses depending on the real estate project.

Long-term Fixed-interest Commercial Mortgage

This is a standard long term commercial lending that can be borrowed from a lender or bank. Though it is similar to home loans, this financing has shorter terms and broader uses. The interest rates may range between 4% to 7%, and its tenure rarely exceeds 20 years, instead of the 30-year repayment schedule. The interest rates can increase or decrease based on market trends. However, with a fixed-rate loan, the payment and interest remain static.

In order to avail of long-term fixed interest commercial loans, the borrower should have a personal FICO credit score of 700 or above. At least one year in business and a minimum of 51% occupancy of the commercial property by the owner’s business are a few other requirements.

Interest-only Payment Loan

Also known as balloon loans, these interest-only payment loans are targeted toward businesses that are expecting a large payout at a future date, rather than a steady monthly income stream at the outset. Payments are usually made only on the smaller interest amount. The full “balloon” payment is due at the end of the term, which is generally between three and seven years. This mortgage is used by business owners to construct or improve a commercial property with the intent to refinance the end-term amount later.

Refinance Loan

As with home mortgage financing options, business owners usually take advantage of commercial real estate refinancing loans at lower interest rates. Though there are additional fees and costs involved when refinancing, they’re usually minimal compared to overall savings through less cumulative debt and lower monthly payments through a blanket loan.

Refinancing of the loan can also boost profit flow through expansion or improvement of commercial properties. It will also help pay off other expenses, such as the final payment on interest-only loans.

Hard money loan

Unlike most other types of mortgages, hard money loans can be availed from private investors. The money is provided based on the commercial property’s value and not the borrower’s credit score, which is usually checked by banks and financial institutions. Though most types of commercial lending options are long-term loans with a substantial number of years for repayment, hard money loans are accounted for as short-term financing.

Borrowers can avail this for brief periods ranging from 6 to 24 months. However, the downside of hard money is the high-interest rate that one has to pay — 10% to 18% — in addition to pricier up-front fees.

Bridge Loan

A commercial real estate bridge loan is similar to a hard loan with lower interest rates ranging between 6.5% to 9%. This financing option also has longer tenures of up to three years and a 14-45 days approval-to-funding wait. To qualify for this loan from a traditional lender, business owners should show a credit score of at least 650. They are also expected to pay a 10% to 20% down payment. Bridge loans are usually used by short-term investors who prefer to renovate or construct a property, before a bigger, more comprehensive refinance.

Construction Loan

Material and labor costs of building structures such as apartments, multifamily rentals, industrial facilities, offices, and retail fronts can be covered under construction loans. Undeveloped land, even the building materials that have already been purchased, can be used as collateral for the loan. The term ranges from 18 to 36 months, usually converting to a long-term mortgage.

Blanket loan

Under the commercial real estate blanket loan, businesses convert multiple properties into one financing arrangement for convenience and flexibility. In case the borrower has ten properties, he can sell two without incurring penalties and use that profit to invest somewhere else.

Though on the upside blanket loans have less paperwork and the increment in investment options are quite commendable, they’re complex mortgages that are difficult to get. They also have large payments and even more substantial potential default penalties.

Types of Commercial Lenders

Several major banks and financial institutions give out commercial loans for a stipulated period and interest rates. It is essential to locate a specialist lender who understands the specific requirements of the industry. Though there are many lenders online, it is necessary to do a thorough check before approaching them. Listed below are some of the commercial real estate mortgage lenders.

  • Banks: national banks, credit unions, and community banks fall under the category of conventional lenders. They provide commercial real estate loans for various uses, be it for investment or commercial mortgage financing. Borrowers qualifying for a traditional loan from a bank can avail of the best rates and amortizations and the most extended terms. However, getting funds for commercial real estate isn’t exactly a cakewalk, as the borrower has to show an excellent credit score along with a high cash-flow and revenue.
  • Small Business Administration: SBA provides commercial real estate lending programs to small businesses that want to acquire, refinance, or develop owner-user commercial real estate. The SBA’s lending programs are not available to commercial real estate investors and speculators. The SBA commercial real estate loans have to be utilized on properties for for-profit small businesses that meet SBA guidelines. At least 51% of the property should be allocated for business uses. SBA 7(a) loans are used to purchase properties and refinance commercial real estate debt. SBA 504 loans are to develop, build-out, and construct buildings for a company’s uses.
  • Private/Institutional Lenders: these non-bank lenders are often run by a single investor or pool of investors concentrating on the commercial real estate sector. Private and institutional financers provide long-term and short-term mortgages, apart from bridge loans and hard money loans. Institutional lenders also offer to finance for both commercial real estate used by a company for its own purposes or for income generation and investment real estate.
  • USDA: the US Department of Agriculture (USDA) also provides commercial real estate loans. However, this is to help under-served businesses in rural communities get the financing they need to improve their business thrive. This program is controlled by the USDA’s Rural Business and Coop Program. Borrowers wanting to avail funds from the USDA’s business loan program should have a good credit score. This is mainly due to the fact though conventional lenders run this scheme, the USDA guarantees a portion of the loan amount.

No matter the kind of commercial real estate venture, there’s a loan and lender for it. Thanks to the rise of online marketplaces and lenders, loans can be easily availed with more customizable options and avenues.

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

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