Types of Commercial Real Estate Loans

Author: Woodsboro Bank

Categories: Blog

If you are considering buying commercial real estate, such as an apartment complex or office space, a commercial real estate loan can be used to fund the purchase if you cannot pay for the property up front. There are several different options for commercial borrowers to consider depending on their goals, finances, and the timeline of their project. Here is a look at some of the most popular types of commercial real estate loans.

Conventional Commercial Loans

business partners find commercial real estate propertyConventional commercial mortgage loans are similar to the ones obtained for single-family homes, but they typically come with shorter terms. Most commercial real estate investors use a traditional fixed-rate mortgage to purchase property. For this type of loan, many lenders ask for a minimum of a 25% down payment to obtain a fixed-rate mortgage with terms of anywhere from 5 to 30 years. However, most commercial mortgages fall in the range of 5 to 10 years. Investors need good credit to qualify for this type of loan, but it is an excellent choice for accessing low-cost capital compared to some of the other available loan options.

Commercial Bridge Loans

Commercial bridge loans provide borrowers with short-term capital that they can use until refinancing, selling, leasing, or improving their property. In some cases, commercial bridge loans may be used to cover an upcoming balloon payment before the borrower refinances to one of the more traditional types of commercial loans. In other cases, these loans might be used for acquiring a property and carrying out upgrades with the intention of increasing rents because of the enhancements and then refinancing the property into a traditional mortgage. A commercial bridge loan is generally intended to provide up to a year's worth of financing before it must be repaid. Because these loans tend to be very short, they carry higher interest rates than permanent commercial mortgages. In many cases, the interest rate will be 50 to 200 basis points higher than that of a traditional mortgage.

Blanket Loans

Investors who wish to purchase several properties can use a blanket loan to facilitate the management of multiple purchases. This allows them to deal with one lender, one set of loan terms, and a single payment. However, this may make it more complicated to sell off individual properties.

SBA 7(a) Loans

SBA 7(a) loans are backed by the Small Business Administration (SBA) and can help businesses buy or refinance an owner-occupied commercial property that has a value up to $5 million. It can provide a borrower with working capital or cover the purchase of commercial real estate. To qualify for this loan, the borrower needs a minimum of a 10% down payment with a credit score of at least 680. They must also have been operating for at least three years. These loans typically carry an interest rate of between 5 and 8.75% and terms of 10 to 25 years. Another stipulation is that the property must be 51% or more owner-occupied. This allows real estate investors to use these loans for their own business as well as properties where they have other tenants as long as their own space occupies more than half of the building's total square footage.

SBA 504 Loans

An SBA 504 loan can be used for as much as 90% of a commercial real estate property’s price and typically carries a term of 20 years when used to purchase commercial real estate or 10 years when used to buy equipment. The interest rates are between 3.5 and 5%, and much like SBA 7(a) loans, the owner is required to occupy at least 51% of the property.

Commercial Hard Money Loans

calculate commercial loan for investmentsA hard money loan is capital that is secured by offering commercial real estate as collateral. This loan is often used to obtain short-term capital, but it tends to be a last resort only used by those who need to move quickly to purchase a property or refinance one. While it may take a month or two for a bank to approve and fund a traditional mortgage, hard money lenders can sometimes release funds in just a week. Hard money lenders tend to focus more on a property’s value and equity than the borrower's creditworthiness. This makes them popular in situations where a borrower is unable to obtain traditional financing. However, this also means they are one of the more expensive ways of obtaining capital.

Discuss Your Commercial Real Estate Needs With Woodsboro Bank

Woodsboro Bank proudly supports local businesses with numerous attractive commercial lending options. Contact us today to schedule an appointment to discuss your business’s goals and the right type of loan to suit your objectives.