Whether you’re venturing into a new subdivision development or seeking to refinance your office building, navigating the realm of commercial real estate loans is essential. Unlike residential properties, commercial real estate encompasses spaces designated for business purposes, such as hotels, restaurants, or shopping malls. The spectrum of borrowers seeking commercial real estate loans ranges from business owners, including small-scale entrepreneurs, to developers and investors. These loans operate distinctively from residential mortgages, differing in underwriting processes, structural frameworks, interest rates, and associated fees. Within this domain, various types of commercial real estate loans cater to diverse needs and preferences.
What Is a Commercial Real Estate Loan?
A commercial real estate (CRE) loan serves a multitude of purposes, ranging from acquiring and constructing to rehabilitating or refinancing commercial, industrial, and non-owner-occupied properties. These encompass a diverse array of real estate assets, such as office buildings, multi-unit rental complexes, medical facilities, warehouses, hotels, or even vacant land earmarked for future development of any of these property types.
If you’re a business owner, you might need to buy or renovate property—that’s where a commercial real estate (CRE) loan comes in. Here are some scenarios where a CRE loan might be the right fit:
- Purchasing an office building to serve as your business headquarters
- Upgrading or relocating your retail space to accommodate growth
- Acquiring a warehouse facility to efficiently manage your inventory
- Investing in, constructing, or refurbishing a hotel for personal operation
When exploring CRE loans, it’s essential to understand the associated rates, terms, and fees. There are various types of CRE loans available to finance your property endeavors, each with its unique set of terms, eligibility criteria, and application procedures.
Frequently, CRE loans are extended to business entities such as corporations, developers, or trusts, although individuals can also secure them. Typically, these loans stipulate that the property must be owner-occupied, implying that your business occupies at least 51% of the building.
How Commercial Real Estate Loans Work
CRE loans work similarly to mortgage loans for personal real estate. One of the main differences is that the loan is secured by a lien against the commercial property rather than a residential property. A lien is a legal claim to a property that can be used as collateral if a loan goes unpaid. In the case of a commercial loan, the lender removes the lien once the loan is paid off.
Types of Commercial Real Estate Loans
The exact terms of a commercial real estate loan depend on the specific type of loan, lender, property financed and more. Some common types of commercial real estate loans include:
PERMANENT LOAN: This is essentially a first mortgage on a commercial property. It involves some amortization and has a term of at least five years.
SMALL BUSINESS ADMINISTRATION (SBA) LOAN: These loans include two main commercial loan programs offered through the SBA—7(a) loans and 504 loans.
HARD MONEY LOAN: These loans are provided by private companies and are designed for borrowers who can’t qualify for traditional financing. Though the approval process is often more lenient, the costs can be much higher.
BRIDGE LOAN: These loans work as short-term financing solutions for when you need cash flow to improve or refinance an existing property or work on getting longer-term financing.
Rates and Fees
Today’s mortgage rates on commercial real estate loans tend to be higher than those for residential loans. They’re typically about 0.5% to 1% higher than the 30-year prime rate for mortgages.
Currently, rates range from 3% to 20%, depending on the exact type of loan, property and your personal financial profile. The repayment term may also be shorter for commercial real estate loans, meaning they can be a bit more expensive than residential loans.
Also, like residential mortgages, commercial real estate loans come with closing costs. Typically, these range between 3% and 5% of the amount borrowed. In the case of SBA loans, you’ll need to pay a guarantee fee of up to 3.75%, depending on the amount borrowed.
How to Secure a Commercial Real Estate Loan
The process for getting a commercial real estate loan is similar to getting a mortgage for a home. You’ll need to provide extensive documentation showing items including your assets, debts, income and credit profile when applying for a CRE loan. Next, you can apply for a CRE loan through a bank, credit union or online lender that offers commercial loans.
It’s important to know that the eligibility requirements for a commercial real estate loan tend to be much stricter than for personal mortgages. Plus, the factors that lenders consider can be a bit different.
Commercial real estate loans are the linchpin of property investment success. Armed with knowledge and a clear strategy, you can harness the power of commercial real estate loans to achieve your financial goals and embark on a prosperous real estate journey.
By understanding the intricacies of these loans, you empower yourself to make informed decisions, navigate the complexities of commercial real estate financing, and secure the financing that aligns with your investment objectives. Whether you’re a seasoned investor or a newcomer to the world of commercial real estate, we’re here to help you reach your financial goals—reach out to our team at AshtonBridge Capital today.