Types of Commercial Real Estate Loans: A Comprehensive Guide
When it comes to financing commercial real estate deals, understanding the different types of loans available is essential.
Commercial mortgages are structured differently than residential mortgages, so it’s crucial to know the options and benefits associated with each type.
In this comprehensive guide, we will explore ten major types of commercial real estate loans, their attributes, and how they can benefit borrowers like you.
Whether you’re looking to invest in long-term real estate or embark on a short-term business venture, this guide will help you navigate the world of commercial real estate financing.
Types of Commercial Real Estate Loans
1. SBA Loans: Government-Backed Financing
SBA loans, or Small Business Administration loans, are an excellent choice for commercial real estate financing due to their government backing.
These loans are guaranteed by the government, which makes them safe for commercial lenders and leads to lower interest rates for borrowers.
SBA loan programs, such as the SBA 504 loan, offer attractive features for commercial real estate purchases.
These loans have low-interest rates, lengthy amortization periods (which reduce monthly payments), and wide availability.
However, it’s important to note that SBA loans are not available to regular real estate investors.
To qualify for an SBA loan, you must meet specific requirements, such as having a for-profit business with cash flow, equity investment from the owner, a demonstrable need for financing, and no outstanding debt to the US government.
If you meet the criteria, you can pursue SBA 7(a) business loans, which provide funding of up to $5 million, or 504 loans, which offer long-term, fixed-rate financing up to $5 million for major assets that promote business growth.
2. Conduit Loans: Pooled Commercial Mortgages
Conduit loans, also known as commercial mortgage-backed security (CMBS) loans, are commercial mortgages that are pooled with similar loans and sold on secondary stock markets to institutional investors.
In a CMBS pool, all loans serve as collateral for each other, minimizing risk and making these loans accessible to entrepreneurs and business owners.
One advantage of conduit loans is that they often offer lower fixed interest rates compared to traditional commercial real estate loans.
They may also provide prepayment options, such as defeasance, which eliminates minimum prepayment requirements.
3. Commercial Mortgages from Traditional Banks
Commercial mortgages from traditional banks are standard loan instruments designed for commercial properties.
These loans have repayment schedules similar to residential loans, ranging from 15 to 20 years, with shorter terms available.
To secure a commercial loan from a traditional lender, you’ll need a 20% down payment, an excellent credit score, and healthy personal and business financials.
If the commercial property will be owner-occupied, the bank may require you to have been in business for at least 1-5 years.
Commercial mortgages from traditional banks are suitable for both small business owners and real estate investors. However, they require an excellent borrower profile, and having an established relationship with the bank can increase your chances of approval.
4. Bridge Loans: Short-Term Financing Solutions
Bridge loans are short-term financing solutions that act as a “bridge” between two different financing states. These loans are useful when you need to close a deal quickly but are waiting for long-term financing approval.
For example, let’s say you have an opportunity to purchase a prime commercial real estate property for your growing business. However, the process of obtaining long-term financing is taking longer than expected, and you risk losing the property to another investor.
A bridge loan can help you close the deal quickly, as if you were making a cash offer. These loans are interest-only, allowing you to keep expenses low while securing longer-term financing or selling the asset.
Bridge loans are asset-based, meaning that the loan’s underwriting focuses more on the quality and performance of the asset rather than the borrower’s personal income and credit score.
This streamlined process allows bridge lenders to work with a variety of investors, including foreign nationals and self-employed business owners.
5. Commercial Refinancing / Commercial Cash-Out Loans
Commercial refinancing loans are secondary loans that you apply for after already having an outstanding loan on a commercial property. By refinancing, you can renegotiate the loan’s terms with the same lender or a new institution.
If you choose a new lender, the funds from the new loan will pay off the existing loan, and you’ll make monthly payments under the new agreement.
Refinancing your commercial loan can be a good option if you can secure a lower interest rate, lower your monthly payment, or if your existing loan is nearing maturity.
In cases where you own the commercial property free and clear (without a mortgage), you can access the property’s equity through a commercial cash-out loan.
The cash can be used for property improvements, debt consolidation, or investing in new ventures.
While refinancing a commercial property offers cost-saving benefits, keep in mind that there are upfront costs associated with the process, such as closing costs and appraisal fees.
6. Commercial Construction Loans: Financing for Construction Projects
Commercial construction loans differ from other loan options as the borrower receives funds in increments, known as a draw schedule, rather than the full loan amount upfront. These loans are often used to purchase land or secure financing after land acquisition.
Interest is paid only on the loan proceeds received at each milestone of the construction process. For example, if you are approved for a $750,000 construction loan but have only received $200,000, you will only pay interest on the $200,000.
Lenders offering construction loans are typically more involved in the construction process, requiring routine inspections to ensure milestones are met. These loans are suitable for borrowers looking to develop commercial properties.
7. Hard Money Loans: Short-Term Loans Based on Collateral
Hard money loans are short-term real estate loans offered by private lenders. These loans have varying repayment terms, ranging from one to four years.
Hard money loans are collateral-based, meaning you provide physical assets such as vehicles, business equipment, or other commercial real estate as collateral.
These loans are advantageous for real estate investors who may have a low credit score or need quick financing. Hard money loans offer up to 70% financing, interest-only monthly payments, and a balloon payment due at maturity.
8. Commercial Real Estate Blanket Loans: Financing Multiple Properties
A commercial real estate blanket loan covers the purchase of multiple properties simultaneously. This loan is ideal for properties in the same shopping complex or multiple buildings across different locations.
Instead of managing multiple mortgage accounts, a blanket loan consolidates all properties under a single mortgage, simplifying payment management and reducing origination fees and upfront costs.
If you have built significant equity in your portfolio, a blanket loan can help you leverage that equity to purchase additional investment properties.
However, defaulting on a blanket loan puts all properties at risk, and if you plan to sell a property tied to the loan before maturity, your lender may require the loan amount to stay within certain loan-to-value (LTV) limits after removing the property.
It’s crucial to work with an experienced commercial loan advisor when considering a blanket loan to align your investment goals and ensure the loan’s structure fits your needs.
9. Multifamily Loans: Financing for 5+ Unit Properties
Multifamily loans are commercial loans for properties with five or more units, such as apartment or condo buildings.
These loans offer higher loan limits, ranging upwards of $5 million. However, qualifying for multifamily loans can be challenging, as lenders require documentation verifying the property’s cash flow.
Both traditional banks and private lenders offer commercial loans for multifamily properties.
Lenders focus on the asset’s quality and income-generating potential, with traditional banks also emphasizing the borrower’s credit score, personal financials, and existing relationship with the bank.
The growing popularity of the multifamily market has led to an increase in real estate and mortgage brokers specializing in this asset class.
Partnering with an experienced advisor can help you navigate the multifamily investment process and connect with the right lender for your specific investment scenario.
10. Commercial Vacant Land Loans: Financing for Land Investments
Land can be a valuable investment due to its potential high return on investment. However, securing financing for vacant land can be challenging, as few lenders are willing to lend on undeveloped properties.
Commercial vacant land loans are often short-term loans ranging from 12 to 24 months. Private lenders specializing in land loans offer these financing solutions. Land deals are considered riskier, so lenders typically require a larger down payment, usually 45-50% of the purchase price.
Investors interested in purchasing land to sell to developers or develop themselves can benefit from commercial vacant land loans. However, these loans are not suitable for long-term land banking strategies, as they focus on short-term investment goals.
Finding the Perfect Loan for Your Commercial Real Estate Needs
No matter your financial situation or specific needs, there is a commercial real estate loan that can work for you. Consulting with knowledgeable commercial loan specialists, such as those at Vaster, can help you find the perfect financing solution.
Start by reaching out to Vaster and explaining your situation. Their team of experts will guide you through the process and help determine the right loan for your budget and business goals. Contact Vaster today to explore your commercial real estate financing options.