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  • Writer's picturePreston Morris

Commercial real estate loans

What Is a Commercial Real Estate Loan?

Just as with home mortgages, banks and independent lenders are actively involved in making loans on commercial real estate. Also, insurance companies, pension funds, private investors and other sources, including the Curbie & Bessie Capital , provide capital for commercial real estate.

Here, we take a look at commercial real estate loans, how they differ from residential loans, their characteristics and what lenders look for.

Building and Developing Commercial Real Estate

Commercial Construction Loans

When building commercial properties, you need a lender that understands costs, entitlements, and future-value. There is a balance that must to be reached between recourse, pre-leasing, pre-selling, cash vs. land equity, leverage and of course, pricing. Not all banks or institutions have the same guidelines. And, not all of them fully understand different asset classes, developer goals/strategies, or sub-markets.

It's important to leverage your financial intermediary’s relationships of in order to negotiate the right terms with the right lender for your commercial development opportunity. When you have paid all your soft costs and impact fees, and are ready to break ground, sometimes it just boils down to certainty of execution.

Whatever your goals; Curbie & Bessie Capital has the debt advisory team on staff to negotiate on your behalf and arrange the most competitive commercial construction financing the market has to offer.

Residential Loans vs. Commercial Real Estate Loans: Key Differences

Commercial Real Estate Loans

  • Commercial real estate loans are usually made to business entities (corporations, developers, limited partnerships, funds and trusts).

  • Commercial loans typically range from five years or less to 20 years, with the amortization period often longer than the term of the loan.

  • Commercial loan loan-to-value ratios generally fall into the 65% to 80% range.

Residential Loans

  • Residential mortgages are typically made to individual borrowers.

  • Residential mortgages are an amortized loan in which the debt is repaid in regular installments over a period of time. The most popular residential mortgage product is the 30-year fixed-rate mortgage.

  • High loan-to-value ratios—even up to 100%—are allowed for certain residential mortgages, such as USDA or VA loans.

Here, we answer the four most common questions about commercial real estate loans:

1. What are the different types of commercial real estate loans?

There are three basic types of commercial loan financing: traditional loans, government-backed Small Business Administration (SBA) loans, and private loans. For all of them, the business or businesses must occupy at least 51% of the square footage.

Traditional loans: These come from banks, which examine your own credit history and that of the business. The longer the business has been around and the more profitable it is, the better your chances of getting a loan are.

SBA loans: These are ideal options if you have been denied traditional funding. There are two types of these loans: an SBA 7(a) loan or a DC/SBA 504 loan. A 7(a) loan can be used by commercial real estate investors who don't own a business in the building. For a CDC/SBA 504, you need to be an owner/occupant and your business must create jobs in the community. The SBA doesn't actually make these loans, but works with approved lenders that follow its guidelines. Qualification requirements are strict.

Private loans: Also known as bridge or hard money loans, private loans carry higher interest rates and are usually for short duration and special circumstances, such as buying a fixer-upper or obtaining funds while you improve your credit rating enough to get a traditional or SBA loan.

2. What's the duration of a commercial real estate loan?

These can range anywhere from five to 25 years. Lengthy loans are risky for banks, so the longer the term, the tougher it is to qualify. Shorter-term loans often require a "balloon" payment of the balance at the end. Another important point to note: Many commercial real estate loans carry stiff penalties for making extra principal payments or paying off the balance early.

3. What are the interest rates?

For traditional loans, you can expect 4.75% to 6.75%. SBA 7(a) loans range from 7.75% to 10.25%, and CDD/SBA 504s currently range from 4.64% to 4.94%. Private hard money and bridge loans, which have terms ranging from six months to five years, can be as high as 30%.

Of course, interest rates fluctuate, so keep checking during your search, especially if the Fed has a rate hike.

4. What about the down payment?

For a traditional bank loan, you'll need to put down 15% to 35% of the purchase price. CDD/SBA 504s require 10% down, and SBA 7(a)s range from 10% to 15%. For a bridge or hard money loan, you'll need to put down 35% to 50%.

Construction loan

Construction loans are taken out to cover the material and labor costs of building structures like offices, retail fronts, industrial facilities, multi-family rental units, and more. If the undeveloped land has already been purchased, it can be utilized as collateral for the construction loan (as can the building materials).

Construction loan terms range between 18 and 36 months, usually leading into a long-term mortgage.

Blanket loan

Under a commercial real estate blanket loan, businesses can fold multiple properties into one financing arrangement for convenience and flexibility. If you have 10 properties covered by a blanket loan and decide to sell two, you can do so without incurring penalties, then use the profits from that sale to invest elsewhere.

While the reduction in paperwork and increase in investment options are attractive, blanket loans have downsides: they’re complex mortgages that are difficult to get, with large payments and even larger potential default penalties.

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