Commercial real estate is defined as income-producing property used solely for business (usually with no residential use). Commercial real estate loans are a subset of business loans that apply specifically to commercial real estate financing – anything from acquisition to construction, to renovation.
There are five primary types of commercial real estate loans:
- Traditional Commercial Mortgage
- Commercial Bridge Loan
- Commercial Hard Money Loan
- SBA 7(a) Loan Used for Commercial Real Estate
- CDC / SBA 504 Loan
Furthermore, commercial real estate loans, like most real estate loans are almost always in the form of a mortgage. The mortgage is secured by a lien on the property, so the bank can foreclose on commercial real estate just as easily as residential real estate.
Note that there is a healthy mix of private lenders, banks, and credit unions, as well as government-backed loans. Some commercial real estate loans are aimed at small to medium businesses, allowing mega-companies to fend for themselves.
Commercial real estate terms to know
Understanding the following terms will help to better comprehend the loans and their intricacies – and navigate a commercial real estate loan application.
- Owner – Occupied: Many commercial real estate buildings are multi-use: malls, shopping centers, offices, and so on. Should a company want a loan to purchase a multi-use property, most loans stipulate that the company has to occupy more than 50% of said property. That makes the property “owner-occupied”.
- Credit Rating: Since commercial real estate loans are usually made to businesses instead of individuals, credit ratings and credit scores are treated differently. Some businesses don’t have a credit rating or financial track record of any kind. Instead, the loans are guaranteed by the combined ‘creditworthiness’ or the owners. This credit history stands in for the business’ credit rating.
- LTV (Loan to Value Ratio): Lenders choose how much to disburse based on the value of a loan to the value of the property (up to the maximum amount they can or will lend). The remainder of the real estate value, after the lender’s LTV contribution, will be the down payment. If a buyer can afford a higher down payment, and voluntarily accept a lower LTV, they will receive better rates.
- DSCR (Debt Service Coverage Ratio): This term describes a measurement of a company’s available cash flow that can be used to pay current debt obligations. DSCR is often used to express the minimum acceptable ratio for a lender.
In the next sections, we break down and compare the five primary types of commercial real estate loans and who they are best suited for.
Check out our Guide to Commercial Real Estate Loans
Traditional commercial mortgage
A Traditional Commercial Mortgage loan is the bread and butter of commercial loans. It’s simply a standard commercial loan that is issued by a bank or other lending institution and it’s not backed by the government.
In other words – it’s just like the familiar residential mortgage we’re all familiar with.
Since a Traditional Commercial Mortgage isn’t backed by the government, there is no maximum limit on the loan amount. However, because of the inherent risk, many companies set their own maximum loan limit in the lower tens of millions.
Who the traditional commercial mortgage is ideal for
If you can qualify, a Traditional Commercial Mortgage is one of the best options for a commercial real estate loan. The requirements are rather strict but reduced risk means commercial lenders can charge lower rates.
- Any company that has a high Credit Rating (700+) should prioritize a Traditional Commercial Mortgage. It will invariably have the most favorable terms compared to other loans that aren’t backed by the government.
- Traditional Commercial Mortgages typically have some of the longest loan terms – as much as 30 years or more. Seek one only if the real estate is a long-term investment in the business.
Traditional commercial mortgage requirements and terms
- Loan amount and terms – Loan up to 80% TLV. The term is usually between 10 to 30 years.
- Interest rate – 4% to 7%
- Required credit rating – 675+
- Required time in business – Minimum 2 years.
- Owner occupied – At least 51%.
- Additional fees – Closing costs up to 5%. Appraisal fee up to $500.
Best vendors for traditional commercial mortgage
Many large banks offer traditional commercial mortgages – probably including your own business’ bank. Check with them first; it’s best to leverage existing relationships.
If that doesn’t work out, try these popular lenders:
- The US Bank is widely regarded as one of the best options for a Traditional Commercial Mortgage. They have terms to suit everyone’s needs – fixed and variable interest, 5/10/15/25-year terms, and a secured line of credit option for real estate.
- Ameritas is another big lender that prides themselves on competitive rates. Expect longer-term loans that are self-amortizing. The customer service is fantastic at Ameritas and funds made available quickly.
- JP Chase Morgan is a big lender that often invests in the hospitality sector through both hotels and long-term residencies (i.e.apartments, condominiums, etc.). They finance projects between $1 million and $25 million and have flexible prepayment options.
Commercial bridge loan
Commercial Bridge Loans are unlike the usual commercial real estate loan – fund disbursement is rapid and term lengths are similarly fast. The purpose of a Commercial Bridge Loan is to put money in the business’ hands fast so that they can compete with potential bidders paying in all-cash.
After the property is secured the borrower refinances their Commercial Bridge Loan into a regular long-term mortgage.
Who the commercial bridge loan is ideal for
Any business that needs money faster than the typical 90 days delay.
- Other types of commercial real estate loans depend on owner occupancy. That’s not so for a Commercial Bridge Loan. This type of loan can help potential owners about to engage in a bidding war for a property.
- Short term real estate investors will find Commercial Bridge Loans a good fit. It’ll enable a fast cash injection to renovate and quickly sell a property before the loan term is up, foregoing the need for refinancing.
- Some Commercial Bridge Loans can be used for construction costs. Long term real estate investors can utilize the fast money to complete renovation before refinancing and settling the deal.
Commercial bridge loan requirements and terms
- Loan amount and terms – Up to 90% TLV.
- Interest rate – 7% to 10%
- Required credit rating – 650+
- Required time in business – 1 year or previous short-term commercial loans.
- Owner occupied – N/A
- Additional fees – Loan Origination Fee around 5%. Closing costs up to 5%. Appraisal fee up to $500.
Best vendors for a commercial bridge loan
Since this is a short-term loan, some lenders have an early payment (prepayment) fee. The additional costs are already pretty heavy, so seek to mitigate them with one of these lenders:
- Arbor is a venerable vendor that primarily deals with bigger properties. They have a minimum $5 million loan and offer 75% TLV. They offer 1-3 year terms (with options to extend), but won’t penalize you with a prepayment fee.
- Commercial Loan Direct will deal with smaller players, accepting loan applications for properties valued at $1.5 million or more. They’re a bit more generous with an average 80% TLV and interest rates that start at 7%. Commercial Loan Direct will waive both prepayment fees and closing fees.
- Park West Capital offers up to 85% TLV on properties between $1 million and $100 million. Most of their clientele take out loans for high-rise apartments, offices, or assisted-living buildings. They offer recourse, non-recourse, and interest-only loan options.
Commercial hard money loan
A Commercial Hard Money Loan is very similar in form and function to a Commercial Bridge Loan. It’s also a short term loan meant to quickly fund real estate purchasing or renovation. The primary difference is that the requirements to qualify are a little lower, yet they come with higher interest rates and less than favorable loan repayment terms.
Also, like some Commercial Bridge Loans, you don’t make monthly payments towards the loan value on a Commercial Hard Money Loan. Only the monthly interest is paid, and the full amount is settled at the end (or refinanced).
Who the commercial hard money loan is ideal for
In most cases, you should prioritize using a Commercial Bridge Loan if possible. The fees will be lower and the terms are, for all intents and purposes, the same.
This loan is a good option if the applicant has had a recent bankruptcy or similarly difficult financial period but pulled through with damaged credit.
Commercial hard money loan requirements and terms
- Loan amount and terms – Between 60% and 80% LTV.
- Interest rate – 8% to 14%
- Required credit rating – 550+
- Required time in business – Required previous commercial loans.
- Owner occupied – N/A
- Additional fees – Loan Origination Fee around 5%. Closing costs up to 5%. Appraisal fee up to $500.
Best vendors for a commercial hard money loan
As with Commercial Bridge Loans, the goal is to seek the lender with the fewest fees and no prepayment penalty (since it should be a priority to get out from under that oppressive interest as quickly as possible). Here are some suitable candidates:
- Allied Commercial Funding is a relatively small player, so they’re willing to budge more than a large corporation. They offer interest rates as low as 7% and are able to waive appraisal fees in certain locations. Loan terms can be 1, 3, or 5 years for maximum flexibility.
- Source Capital is a hard money lender whose loan rates start at 8% and specialize in fast approval and funding with minimal paperwork. They have no income or FICO score requirements and also work with foreign nationals.
- Fairview Lending has particular requirements for Commercial Hard Money Loans – they want to see other real estate and successful past loans. They choose to work only with experienced real estate investors and that helps to streamline the application process – expect 0 upfront fees and loan approval in less than 10 days.
SBA 7(a) Loan for Commercial Real Estate
An SBA 7(a) Loan isn’t actually a small business loan with funds earmarked for real estate investment. The SBA 7(a) is a mortgage disbursed by the US Small Business Administration(and backed by the government) for working capital, although it’s commonly used to purchase commercial properties.
This loan is a bid by the government to stimulate a thriving, growing economy. As such, it’s intended for small to medium sized businesses.
Unlike some of the other commercial real estate loans we’ve discussed, SBA 7(a) loans require a majority of owner-occupied property.
Who the SBA 7(a) loan is ideal for
The SBA 7(a) loan is not for people and businesses that need money fast. It’s also not for people that have less than stellar Credit Ratings. It’s designed to service those small business owners that would be rejected by a bank but are still valuable.
- SBA 7(a) loans are given to both existing businesses and new ones, which make it an ideal way to get your foot in the door. In fact, the loan is geared towards those lower-demographics – the maximum funding amount is only $5 million.
- SBA 7(a) loans are a long-term loan with low-associated fees. If you can swing it, this is the sort of loan you should refinance a Commercial Bridge Loan or Commercial Hard Money Loan into.
- Very well-qualified buyers can have their down payment requirements waived. If you have a Credit Rating above 700+, significant business cash assets, and several years of stable and positive growth, you may be able to get a loan for 100% TLV.
SBA 7(a) loan requirements and terms
- Loan amount and terms – Up to 90% TLV with a $5 million cap.
- Interest rate – 5% to 8.75%, both fixed and variable.
- Required credit rating – 675+
- Required time in business – 0 to 3 years.
- Owner occupied – At least 51%.
- Additional fees – 0% to 4% SBA Guarantee Fee. 2% to 5% closing costs. $500 appraisal fee.
Best vendors for an SBA 7(a) loan
Although the loan is ultimately owned by the SBA, there are many SBA-approved lenders. These partners range cover all manner of financial institutions, from huge multinational banks to local credit unions. Check your own business bank to see if they participate. If not, here are some reputable lenders:
- Celtic Bank is an all-around great vendor. They will facilitate SBA 7(a) loans from as little as $300k all the way up to the 5 million cap. Furthermore, to help qualify prospects, they accept real estate, equipment, and inventory as capital.
- Wells Fargo is no doubt a familiar name. They’re also one of the largest distributors of SBA loans in the country. Although they are occasionally associated with less than stellar customer service, their products are not lacking.
- Northeast Bank is an unusually helpful lender. They have teams of experienced professionals from a variety of industries – hospitality, restaurant, auto, recreation, etc. – all on standby. When an applicant from a supported industry applies, they get set up with a customized team to streamline the process.
CDC / SBA 504 Loan
Although similar in many respects to the SBA 7(a) loan, the CDC / SBA 504 Loan is more complicated – and potentially much more valuable.
To start, it’s actually two loans. The first is an SBA 504 Loan which has many of the same (strict) requirements as the SBA 7(a). The kicker is that it only funds up to 50% TLV… but there’s also no maximum funding amount.
The other half is a loan by a private Certified Developing Company (CDC). They usually pay out up to 40% TLV – also with no cap. Whatever is left over, around 10%, is the borrower’s down payment.
There are several additional requirements for the CDC / SBA 504 Loan:
- The company can’t have a net average income of more than $5 million over the past two years.
- The company’s tangible net worth also has to be less than $15 million.
- The total loan amount must be less than the personal assets of the business owner.
- If it’s funding new construction (which the CDC / SBA 504 Loan doesn’t have to be for real estate), the business must occupy at least 60% of the property initially and 80% within 10 years.
- For every $65k issued, the company must create or retain one job.
Who the CDC / SBA 504 loan is ideal for
Reading between the lines up above should give a clear indication of who this loan is for. It’s not for ultra-wealthy property barons and billionaires looking to squeeze pennies. It’s a loan meant for the ambitious little guys who want to pull others up with them.
- A CDC / SBA 504 Loan is an excellent choice for rapidly growing companies that don’t have enough liquid assets to put more than 10% down on a new commercial real estate property.
- The CDC / SBA 504 Loan is intended to pump growth quickly, especially in the employee department. With all the extra manpower this loan enables (and requires), an adept businessperson will be able to make strides.
CDC / SBA 504 loan requirements and terms
- Loan amount and terms – Up to 90% TLV, unlimited fund cap.
- Required credit rating – 700+
- Interest rate – 3% to 6%
- Required time in business – Greater than 3 years.
- Owner occupied – At least 51%, possibly more.
- Additional fees – Up to 4% SBA Guarantee fee (on SBA portion). Up to 2% CDC Processing fee (on CDC portion). Up to 5% closing costs. $500 appraisal fee.
Best vendors for a CDC / SBA 504 loan
Fortunately, a business interested in a CDC / 504 Loan doesn’t have to go through the trouble of finding both a bank and a certified developing company. Any lender that offers a CDC / 504 Loan will also have a CDC partner already in place.
As with the SBA 7(a), there are many national and local banks that are partnered with the SBA. Here are some noteworthy ones:
- Capital CDC is an approved lender with two big benefits. The first is that they will work with startups and specialized, niche companies, albeit with a slightly lower contribution rate. Second is that they are one of the few CDCs that have a fixed instead of variable interest rate.
- Liberty SBF is a lender that will fund up to a whopping $14 million. They are particular about applicants and prefer to fund hospitality or multi-use properties. There are some higher than average fees involved, so weigh your options carefully.
- TMC Financing also works with startups and single-use facilities. Payment terms generally run 20 years and are fully amortized. Unlike some other lenders, TMC does not require any term financing. Additionally, soft costs such as closing fees can be paid with the loan amount.
