Finance

A Complete Guide To Commercial Real Estate Loans

We don’t have all the money in the world to accomplish all the tasks we have at hand. When it comes to building projects, there are different ways to finance them without breaking a sweat. Home mortgages are available to qualified property owners who want to build a place to live in. But what happens when you want to build a place for business purposes?

Commercial real estate loans are usually for financing properties that are constructed for business purposes. Whether you are looking to build a mall, a hotel, a shopping center, or a complex – you can do that with a commercial real estate loan.

Read on to find out everything you need to know about taking a commercial real estate loan for your next building project.

What is a Commercial Real Estate Loan?

A Commercial Real Estate loan or CRE loan for short is a type of loan taken to invest in a business premise. The loan can either be used to buy the properties needed for business purposes or renovate the same. It is also possible to use commercial loans to construct the building, especially if you are looking to start from scratch.

What Type of Real Estate can be Financed with Commercial Real Estate Loans?

You can take the loan and put in different income-producing properties that are needed for business purposes. Examples of the real estate or building projects covered by the loan are:

  • Lodgings, such as condominiums, hotels, and lodges.
  • Medical facilities, such as hospitals.
  • Office buildings and complexes.
  • Raw land – in the case that you want to build on it.
  • Mixed-use buildings
  • Malls
  • Shopping centers
  • Recreation parks
  • Self-storage facilities, such as industrial warehouses.

How Does the Commercial Real Estate Loan Work?

The loan works almost the same as home mortgages do. The major difference is that the repayment plans might differ. Some CRE loans require the borrower to repay the principal or borrowed amount at the end of the loan term. In this case, the borrower has to pay only the interests – usually, every month.

Yet, some CRE loans might require the borrower to repay a certain percentage of the principal/borrowed amount, alongside the interest rate every month.

How to Get the Loan Financed?

Several avenues can be exploited to get the best commercial real estate loan. The major financers are:

  • Private investors
  • Insurance companies
  • Pension funds

Types of Commercial Real Estate Loans and How They Work

The CRE loan you might be qualified to take depends on several factors. Here are some of the popular types of commercial real estate loans and how they work. From the list, you can pick the one that aligns with what you are looking to establish with the loan.

1.    Traditional Commercial Mortgages Loan

This is one of the most popular types of CRE loans. It is also one of the loans that are not backed by the Federal Government. Instead, the lending institution, such as a bank is strictly in charge of disbursing the loan. Therefore, the agreement on the terms of the loan, as well as the acceptance is between the borrower and the lender (the bank).

Below is a table showing the terms involved in taking a traditional commercial mortgage loan:

TermsValue
Down PaymentBetween 15% and 35% of the loaned amount.
Loan-to-Value (LTV)Between 65% and 85% of the loaned amount.
Interest RatesBetween 5% and 7%
Repayment TermsMonthly payment
Approval Timeframe45 days maximum
Length of the LoanBetween 5 and 20 years
Minimum Number of Years in BusinessA year
Minimum Personal Credit Score700

Note: The Loan-to-Value (LTV) of 85% is required because the borrowers are expected to make a down payment of 15% to 35% of the amount they are taking as a loan. This is to help the lender to have a higher chance of marketing the property or collateral up to 85% of the fair market value if the borrower defaults on the loan payment.

2.    SBA 7 (A) Loan

This is the most popular out of the Small Business Administration (SBA loans) backed by the United States government. Although the requirements for qualifying are stricter, we think it is worth it because of the range of options for investing in the loan.

The SBA 7 (a) loan is not limited to purchasing properties. It can also be used for other purposes, including:

  • Expand the operating capital of an existing business.
  • Debt restructuring
  • Refinancing owner-occupied commercial properties.
  • Inventory purchases
  • The purchase of the commercial real estate by newer enterprises.

Where to Get SBA 7 (A) Loans

You can get this loan from SBA-approved lenders, such as:

  • Private lenders
  • Traditional banks
  • Credit Unions

Qualifications and Terms for SBA 7 (A) Loans

Here is an overview of what it takes to qualify for SBA 7 (A) loans:

TermsValue/Description
Down PaymentUp to 20% of the loaned amount.
Maximum Loan Amount$5 Million
Interest RateBetween 7.5% and 10%
SBA Guarantee FeeUp to 3.75%
Payment PlanMonthly principal and interest rate repayments.
Typical Loan TermUp to 25 years from the time of borrowing.

3.    Commercial Hard Money Loans

This type of commercial real estate loan is issued to companies that find it hard to get other loans. Usually, it is issued to companies or businesses with less than stellar credit records.

Where to Get Commercial Hard Money Loans

Hard Money loans are not always easy to get from a Credit Union or a commercial bank – mostly because of the lower credit score.

You may only be able to obtain the loan from:

  • Private lending companies
  • Private investors

Commercial Hard Money loans are mostly short-term and are usually used for renovating a commercial property. After then, a long-term commercial real estate loan will be applied to refinance the loan.

Note that the loan is mostly backed or guaranteed by the value of the property for which the loaned amount will be used for renovation.

Read More: Hard Money Lending: Everything You Need to Know

Terms of Commercial Hard Money Loans

Looking to take Hard Money loans? Here are the terms:

TermsValue
Down PaymentUp to 35% of the loaned amount.
Maximum Amount to BorrowUp to $2.5 Million
Loan-to-Value (LTV)Up to 80%
Interest RateBetween 8% and 12%
Minimum Credit Score600
Loan Term/Maximum DurationBetween 1 and 3 years.

Conclusion: Take a Commercial Real Estate Loan to Finance Your Commercial Properties

Taking a commercial real estate loan to renovate, acquire or construct a commercial property is a step in the right direction because it is an income-yielding venture. When you take into account the flexibility of the payment plan, the liquidity of the loan, and security, you will agree that it wouldn’t be a bad idea, after all, to take a loan to move your business to greater heights.

Chukwukadibia Abah
CHUKWUKADIBIA ABAH is a passionate freelance writer and contributor to the Entrepreneur Business Blog. You can follow him on: Facebook: https://web.facebook.com/ChukwukadibiaAbah1/ Twitter: https://twitter.com/Chukwukadibia01 LinkedIn: https://www.linkedin.com/in/chukwukadibiaabah/ Instagram: https://instagram.com/chukwukadibia_abah

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