Commercial Loans – Types of Loans & Lenders, Key Terms and How to Get One – Complete Guide

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The second half of 2024 should be largely positive for the commercial real estate industry as multifamily properties continue to perform well, along with retail and industrial, according to JP Morgan’s recent report.

So, if you’re interested in investing in CRE—whether you’re an investor looking to improve an existing property or a developer seeking funding for your upcoming project—now is an excellent time to look at commercial real estate loans.

In this blog, we examine the types of commercial real estate loans: the options available, how they work, who typically lends and uses them, and how to apply for these funding solutions.

We aim to simplify the lending process by exploring five different CRE loan types and showing how they work in new acquisitions and refinancing scenarios.

Types of commercial real estate loans

In general, commercial real estate can be categorized into four primary types enumerated below. Each type serves different purposes and comes with unique terms and conditions tailored to various financial needs and CRE scenarios.

1. Conventional mortgage loans for commercial real estate

Conventional mortgage loans are similar to residential mortgages but usually have shorter terms. Many commercial real estate investors buy properties using these traditional, fixed-rate mortgages.

Requirements and terms:

These loans typically require a minimum down payment of 25% and offer terms of 5 to 30 years. Unlike residential mortgages, which often extend up to 30 years, commercial mortgages usually have shorter terms, ranging from 5 to 10 years.

Lenders require appraisals to establish the property’s value and financial documentation to ensure that the rents the property generates can cover the debt service.

Common users:

Investors purchasing occupied assets with positive cash flow often use conventional commercial loans. These investors usually need good credit scores (700 or above) to access relatively low-cost capital compared to other financing options.

Lenders of conventional CRE mortgage loans:

Central American banks such as JPMorgan Chase, Wells Fargo, Capital One, and Bank of America are the leading conventional commercial real estate loan providers. Other lenders include large insurance companies and property investment firms like MetLife and Prudential.

2. Bridge loans for commercial real estate

Bridge loans are useful for CRE investors who need to pay imminent balloon payments. They provide funding to cover debt service until the property can be improved, refinanced, leased, or sold.

Commercial bridge loan terms:

Bridge loans are short-term, generally providing financing for only 6 to 12 months. They also come with higher interest rates than permanent commercial mortgages—typically 50 to 200 basis points higher than traditional mortgages. Note that these rates fluctuate based on the deal’s nature.

Practical examples of how commercial bridge loans are used:

Let’s say that you’re an investor who wants to acquire a 200-unit apartment complex with a 30% vacancy rate for $10 million, and according to your calculations, a $2 million investment in renovations could potentially boost the property’s value to $18 million.

In this case, you may use a commercial bridge loan of $12 million to finance both the purchase and the improvements. After renovation, you can secure a traditional mortgage to repay the bridge loan and manage the new mortgage from increased rents.

Lenders of commercial bridge loans:

Specialized finance companies, investment funds, and private money lenders are the leading providers of commercial bridge loans.

They’re much faster than traditional banks in handling complex and urgent CRE transactions, so they can offer the flexibility and speed that CRE investors need to grab opportunities like property auctions or urgent renovations.

These lenders focus on the property’s value and the project’s overall feasibility rather than the borrower’s credit score, allowing them to offer personalized and flexible lending solutions.

And because commercial bridge loan lenders operate in a niche market, they have a deeper understanding of CRE market dynamics and the challenges that often come with transitional property situations.

These lenders are accessible through networks like mortgage brokers or real estate investment groups. They play a crucial role in maintaining the CRE market’s fluidity and dynamism because they can release immediate funding to projects or borrowers who might not meet the stringent criteria imposed by traditional banks.

3. Hard money loans for commercial real estate

Hard money loans come from non-traditional sources of capital—typically individuals or companies.

Secured by commercial real estate on which the borrower plans to make improvements, these loans are less concerned with the borrower’s creditworthiness and more with the property’s value and equity.

Key characteristics & advantages of hard money loans for commercial real estate:

The most significant advantage of hard money loans is their rapid processing times. Funding is usually available within a week—dramatically quicker than the typical 30 to 60-day traditional loans require.

Because of this speed, CRE investors use them to fund auction purchases or quick acquisitions that must close within tight deadlines.

Terms and suitability:

Hard money loans are best suited for short-term financial needs. They come with higher interest rates (generally ranging from 10% to 20%)—after all, lenders assume higher risks in these deals.

These loans also work well for borrowers who own valuable CRE assets but don’t qualify for traditional financing due to a low credit score or insufficient income history.

Types of scenarios suited for hard money loans:

  • Quick purchases
  • Renovations and flips/resale
  • Distressed properties in poor condition that do not qualify for traditional loans

Lenders demanding money for commercial real estate

Hard money lenders are often private companies or individual investors who specialize in riskier investments that traditional banks like to avoid.

These lenders evaluate loan applications based on the property’s potential market value after improvements rather than the borrower’s financial status.

They require the property to be collateral and often demand a first-position lien. This means that if the borrower defaults, the lender has the first claim on the property.

Stated income loans for commercial real estate

Stated income commercial real estate loans allow borrowers to declare their income without extensive documentation, making the loan process much quicker and less cumbersome.

This type of loan is particularly appealing to self-employed individuals and business owners who have irregular income patterns and might struggle to produce the traditional documentation banks require.

Benefits & uses of stated income loans for commercial properties:

Aside from being a low-documentation type of loan, stated income financing is also versatile—the proceeds can be used to buy, refinance, or cash out commercial properties.

Requirements & risks of stated income loans for commercial properties:

Lenders who provide stated income loans for CRE often look at the borrower’s credit score, so you need a decent score if you are interested in this financing type. They will also look at the property’s value, as it will be used as collateral.

Note that these loans have higher interest rates than conventional CRE loans because they have less stringent documentation requirements and are riskier for the lender.

Even so, they can be well-suited for borrowers who need fast access to funds. If you intend to take out a stated income loan, state your income accurately to avoid potential legal repercussions.

Choosing a CRE lender

The four types of loans discussed in this blog provide flexibility and rapid funding to commercial real estate borrowers who must act quickly on opportunities that would otherwise be inaccessible due to the slower pace and stricter requirements of conventional financing options.

If you’re a borrower looking to work with a hard money lender, don’t forget these tips:

  • Work only with lenders that have established a history of fairness and transparency.
  • If applicable, clarify the interest rates, origination fees, and any penalties for early repayment.
  • Review the terms carefully before signing anything. Terms between lenders vary greatly, especially concerning loan-to-value ratios, loan duration, and repayment schedules.

How to get commercial real estate loans

At Private Capital Investors, we specialize in providing direct private commercial real estate loans to borrowers who want to invest in CRE assets. We can tailor a loan package to meet your project’s unique requirements.

We provide flexible financing solutions if you’re interested in a hard money loan, commercial bridge financing, or a stated income loan.

Our commercial real estate loan programs, are available nationwide, including Dallas, Houston, Austin, Miami, Phoenix, Atlanta, Seattle, etc.. Expect approval within 24 to 48 hours and funding in as little as 14 days.

Our interest rates are also among the lowest in the market, starting at 8.5%. We pride ourselves on excellent customer service and common-sense underwriting practices.

Unlike traditional lenders, the Private Capital Investors team knows the CRE market. We understand precisely what you mean and are ready to propose competitive loan solutions.

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

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