• Retirement and Annuity Advisor Jennifer Lang

Types Of Commercial Real Estate Loans: Your Top 5 Options

Updated: Nov 8, 2020

Purchasing or refinancing a commercial real estate (CRE) property can help a business owner build personal net worth and strengthen their business. Here’s basic information about commercial real estate along with a breakdown of funding options. Low rates, long terms, and avoiding a balloon payment should be your goal when looking for a CRE loan.


Introduction to commercial real estate


Commercial real estate loans let business owners purchase, renovate, or refinance commercial real estate. Here are types of commercial real estate.


Apartment buildings, townhomes and condominiums To be classified as commercial real estate, five or more living units are required. Residential properties of four or fewer units are not considered commercial and can be purchased with a personal loan.


Office buildings

Pricing for office buildings varies depending on numerous factors. Generally, office buildings in urban business districts are the most expensive. Prices tend to come down the further away an office building is from a commercial business district.


Retail buildings

Stand-alone shops qualify as a retail building. Strip malls and large regional malls also fit into this category.


Medical facilities

Medical facilities are classified as hospitals, surgical centers, urgent care clinics, and nursing homes.


Warehouses and industrial spaces

These facilities are usually located outside of cities with easy access to product and material transportation and can be used for a variety of manufacturing, assembly, and storage.


Hotels and resorts

This broad category involves extensive paperwork and regulation. Real estate can include hotels, motels, extended-stay facilities, casinos, corporate and independent inns.

Generally, buildings with 51% owner occupancy qualify for loans more quickly and easily, as lenders see that the business is more invested. Often, owner occupancy is a requirement to qualify for a CRE loan.


If you’re considering purchasing a property where you can run your business from, here are types of commercial real estate loans to explore.


1. Conventional mortgage loans


You can go straight to a bank for a commercial real estate (CRE) loan. Traditional commercial mortgages take between 30-45 days for approval and funding and are issued by traditional banks and lending institutions. This type of commercial loan is secured by the property being purchased and terms vary depending on the lender. Some banks will make fully amortized loans with long terms while other banks may have interest-only loans with terms of just 10 years. It’s generally harder to qualify for this type of mortgage than other types because strong credit scores and a low debt service coverage ratio are required.


Pros:

There is no maximum loan amount with a traditional commercial mortgage. This is because these mortgages aren’t backed by the federal government and overall loan amounts are up to individual lenders.


Cons:

The qualifications for a traditional commercial mortgage are a little tougher than with a government-backed alternative. This is because the lender assumes the full risk. Another downside is that, unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years. This means payments are large and can cut into cash flow. Commercial mortgages may also have a balloon payment, common in commercial real estate loans. This is a mortgage which does not fully amortize over the term of the loan, leaving a large balance due at maturity.


2. Hard money loans


Hard money loans, also referred to as bridge loans, are short-term lending instruments that real estate investors can use to finance an investment project. According to Investopedia, this type of loan is often a tool for house flippers or real estate developers whose goal is to renovate or develop a property, then sell it for a profit.


Pros:

The process for these types of loans are fairly quick since you are working with one lender or a small group. Hard money lenders are not interested in your credit score or debt load. Lenders look at the asset backing the loan – the property. Taking out a hard-money loan and paying it back responsibly can help you establish a relationship with the lender, who may be more likely to work with you in the future.


Cons:

Hard money loans have a much higher interest rate and processing fees than other commercial property loans. Another con are the short loan terms. Hard money loans are often just a few months or a few years while typical mortgages are 15 or 30 years.

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3. SBA 7(a) loans