Thinking of buying commercial real estate like office spaces or an apartment complex?
You’ll likely need a commercial real estate loan to help you make the purchase.
There are quite a few loan options out there for commercial properties and choosing the best one for your situation can take a little bit of research. Here’s a look at the commercial real estate loan types and what they mean for you as a borrower.
Express Mortgage Lending, Inc (EML) is a licensed Mortgage Broker (NMLS# 2119891)
What is a commercial real estate loan?
As its name implies, commercial real estate loans are designed for individuals and businesses who are looking to purchase, refinance or expand income- producing properties. Commercial loans are used to purchase commercial spaces like offices, strip
malls, storefronts, restaurants, or warehouses. They can also be used to purchase larger multi-family dwellings, such as apartment complexes.
The Application Process and Requirements
The exact application process for a commercial loan will differ depending on the type of loan. In general, commercial loans are harder to qualify for and have a longer approval period. Requirements are more stringent. After all, lenders have more money on the line, and it’s riskier. If your business or investment strategy fails to generate the income you expect, how will you make your payments? Lenders will use a lower loan-to-value ratio to determine how much money they can extend to you. With consumer mortgages, some borrowers can qualify for nearly 100% financing. However, with a commercial loan, that number will be around 75% to 80%. They will also consider your DSCR, or debt service coverage ratio, which measures your ability to repay the loan with
your existing cash flow.
Unlike conventional 15-year and 30-year mortgages, business loans typically have much shorter loan terms.
Like a consumer mortgage, the commercial property will be collateral for the loan that you take out. However, some loans and lenders may also require a personal guarantee depending on your situation.
Types of Commercial Real Estate
Not all commercial loans used for real estate are created equal. Here are some of the most popular types.
Depending on the needs of your business and its qualifications, there are six primary types of commercial lending that you can use to achieve your goals:
1. Permanent loans
2. SBA loans
3. Bridge loans
4. Lines of credit
5. Hard money loans
6. Owner financing
We have a variety of lenders for each type of loan.
A permanent loan is the first loan on a commercial property, similar to a traditional mortgage loan. You can typically get a permanent loan from any commercial lender, but they’re not available for short-term financing needs—they typically have an amortization schedule and a repayment term of five years or more.
The U.S. Small Business Administration provides guarantees for some commercial real estate loans, and these loans are often called SBA real estate loans. There are two loan
programs under which you can get commercial real estate financing: SBA 7(a) loans and SBA 504 loans. Real estate investors are not eligible for these loans.
SBA 7(a) Loans
The SBA 7(a) loan program is more general in nature, and
business owners have a lot of flexibility in how they can use the funds. The loan is even available for non-real estate financing needs, including purchasing inventory and providing working capital. Also, SBA 7(a) loans are provided through a single private commercial lender, and up to 85% of the loan amount is guaranteed by the SBA. Down payment requirements start at 10% but can be much higher depending on the lender and the circumstance.
SBA 504 Loans
With the SBA 504 program, small business owners must use the funds to finance the purchase of commercial real estate or machinery and equipment, renovate an existing
commercial property, or refinance an eligible commercial real estate or construction loan.
Also, SBA 504 loans are provided through two lenders: a private commercial lender, which provides 50% of the project costs, and a certified development company (CDC), which provides 40%, all of which is guaranteed by the SBA. You provide the remaining 10% as a down payment, though some situations may require more than that amount.
Each type of commercial loan that we’ll look at in just a minute will have a slightly different process for applying and getting approved. Spend time looking at requirements to make sure you have all the necessary paperwork to strengthen your application.
Finding the Right Commercial Property
Loan for You
Understanding the difference between the types of loans is important for getting the financing you need for your business. If you’re unsure which commercial real estate loan is right for you and your situation, our Mortgage Consultant is available to help you weigh your options and point you in the right direction. Don’t waste hours of work finding and applying for loans you have no
chance of getting — speak to one of our Commercial Mortgage Loan Consultants and get matched based on your business's credit profile today.