Real Estate Loans
Commercial Real Estate Loans
A commercial real estate loan is financing used to purchase, refinance, or develop income-producing properties for business use. These loans are common for developers, investors, and business entities that need capital for larger projects.
What Qualifies as a Commercial Real Estate Loan?
- Office buildings
- Retail centers or malls
- Industrial warehouses
- Multifamily housing (usually 5 units or more)
- Hotels and resorts
- Mixed-use developments
These loans are typically made to business entities such as corporations, developers, partnerships, or trusts, rather than individual borrowers.
Key Features of Commercial Real Estate Loans
- The loan term usually runs 5 to 20 years. Many include a balloon payment at the end, and amortization may extend longer than the loan itself.
- Interest rates can be fixed or variable. Rates are generally higher than residential mortgages because lenders take on more risk.
- The Loan-to-Value ratio (LTV ratio) is often between 65% and 80%. A lower ratio means the borrower contributes more equity.
- Debt service coverage: lenders usually want the property’s income to cover loan payments with a cushion, typically around 25% more than required.
- The property secures the loan, and lenders may also request personal or corporate guarantees as collateral.
Types of Commercial Real Estate Loans
- Traditional commercial mortgage: Offered by banks or credit unions, with fixed or variable rates and standard amortization schedules.
- SBA loans (504 and 7a): Backed by the U.S. Small Business Administration, offering favorable terms for small businesses.
- Bridge loans: Short-term funding that covers costs until long-term financing is secured. These loans come with higher interest rates but faster access to funds.
- Hard money loans: Provided by private investors and based more on property value than borrower credit history.
- CMBS loans (Commercial Mortgage-Backed Securities): Loans that are bundled and sold to investors. They offer fixed terms and are usually non-recourse, but flexibility is limited.
- Construction loans: Designed for new developments, with funds released in stages as work progresses.