Whether you’re a business or a broker working in conjunction with a business, finding the right commercial real estate loan is almost always required if the business plans to expand or renovate. Commercial real estate loans function similarly to real estate loans, in that the loan requires a down payment and is typically paid off over a period of time, and interest rates can vary depending on the type of loan.
Commercial real estate loans can be used for warehouses, medical offices, office buildings, apartment buildings, retail or shopping centers, industrial buildings, hotels, or restaurants. Depending on the property, different terms and rates apply, including variations to the down payment, repayment terms, and fixed or variable interest rates. It’s also important to keep in mind that a commercial real estate loan requires the owner of the building to occupy at least 51 percent of the property, so if this is not your plan, an investment property loan is a more suitable option.
In this article, we go over the most common types of commercial real estate loans, when to use them, and their terms to help you make the right decision.
Traditional Commercial Loan
One of the most common types of commercial real estate loans, a traditional commercial real estate loan can be used to purchase a number of properties, including industrial buildings, retail centers, and office buildings. This loan tends to be harder to qualify for compared to other loans. It requires good credit history, proven business success, and a low debt-service coverage ratio.
The terms for this loan vary depending on the lender. For some banks, the loan will be fully amortized (scheduled, periodic payments) with loan terms up to 25 years and loan-to-value (LTV) ratios up to 80 percent. Other banks only offer 10-year terms and 65 percent LTVs. Be sure to consult with your lender on their terms as soon as you determine what would be the most beneficial terms for your situation.
Commercial Bridge Loan
As the name suggests, a commercial bridge loan “bridges the gap” between a business’s current situation and the time when the business can secure long-term financing for the commercial property. Businesses usually use a bridge loan for projects that wouldn’t qualify for a traditional mortgage loan, such as property renovations. This loan is great for businesses looking for a quick turnaround between the application and securing the loan.
Here are some additional commercial bridge loan features:
- The payment terms tend to be shorter, usually from 6-48 months.
- Very few are amortized, which means businesses make periodic interest-only payments with a balloon payment at the end.
- The required down payment tends to be between 10-20 percent, which is low compared to traditional commercial loans that require between 20-35 percent down payment.
Soft and Hard Money Loans
Similar to bridge loans, hard money loans serve a business during an interim period with short terms, higher interest rates, and interest-only payments. Like a bridge loan, they are easier to qualify for compared to traditional loans. However, hard money loans differ from bridge loans in that they are funded faster and made by private companies instead of banks, which means the down payment is higher.
Soft money loans are great for startups looking for capital to help them find their feet. These loans place a significant weight on a business’s creditworthiness and application. Interest rates are lower, as are down payments, and terms tend to be longer than hard money loans. Soft money loans are quick to close, which makes them a great option for businesses that need to move quickly on a property or renovation without paying high rates.
SBA 7(a) Loan
The SBA 7(a) loan is provided by the Small Business Administration (SBA) and can be used to purchase buildings or land, renovate existing property, or construct new property. Like a traditional loan, the owner must occupy the real estate.
Here are some additional terms and conditions of a SBA 7(a) loan:
- Borrowers can borrow up to $5 million through an SBA-affiliated lender.
- The interest rates can be fixed, variable, or a combination of the two.
- The loan is fully amortized, and repayment can be up to 25 years.
SBA 504 Loan
The SBA also offers the 504 loan for real estate occupied by the owner and long-term equipment purchases, including, but not limited to, highly calibrated machinery, manufacturing equipment, and equipment that generates renewable energy. If the loan is used to purchase real estate, the maximum term is 20 years. To acquire this fully amortized loan, at least 10 percent in down payment is required.
The 504 loan is composed of two different loans:
- From the Certified Development Company (CDC): This loan covers 40 percent of the overall loan. This portion of this loan can go up to $5-$5.5 million.
- From a bank: This loan covers 50 percent or more of the overall loan. The interest rate on this loan is typically variable.
A Fast-Acting Lender with a Local Presence
As a business or broker of a business, you can reach the next phase in your operations with the right loan. As you can see, there are a number of different types of commercial real estate loans that are nuanced in terms and use, and you need the right bank to guide your decision.
As a family of community banks, we can execute deals quickly, provide answers in a timely manner, and provide an overall excellent customer experience. Throughout our 90-year history, our local commercial real estate lending experts have helped businesses in Central and Southwest Florida.
To learn more about the different types of commercial real estate loans, contact us today!
Important disclosure: The information provided in this material is intended for educational purposes and is not intended to provide specific advice or recommendations for any individual. While other traditional lenders participate in commercial bridge loans, the Crews family of banks does not offer bridge loans, nor do they offer soft and hard money loans. All loans are subject to credit approval.