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Any property that’s used for business activities is known as commercial real estate. Commercial property typically refers to a building that houses a company but also refers to land use meant to generate a profit.
If you’re thinking of buying or renovating commercial real estate, you’ll likely need a commercial property loan to pay for the purchase or expenses involved. Read on to learn more about this matter and discover what your options are.
Understanding Commercial Real Estate Loans
Similar to taking out a home mortgage, business owners can also take out a mortgage for buying or remodeling a commercial property. Commercial real estate loans help entrepreneurs finance the purchase or renovation of everything from apartment buildings, office buildings, and hotels to shopping or retail centers, restaurants, and industrial establishments.
Most commercial mortgages require the property to be owner-occupied. This means that the business should physically occupy at least 51% of the building. Otherwise, borrowers can just take out an investment property loan.
Rates and terms can vary depending on the lender and the property being financed. Interest rates can be either variable or fixed. Down payments usually range from 10% to 30% with repayment terms as short as five years and as long as 25 years.
Different Types Of Commercial Real Estate Loans
Business owners have a variety of options for commercial real estate loans. Here are some you can consider:
1. Traditional Commercial Property Loans
A traditional commercial mortgage is similar to a residential mortgage in that it’s secured by the property being purchased. It tends to carry lower interest rates than other property loan types, making it especially appealing to business owners.
The terms can vary from lender to lender. Most banks offer fully amortized loans with up to 20 years of repayment terms and loan-to-value ratios of up to 80%. Others have interest-only loans with terms of 10 years or less and a loan-to-value ratio of 65%.
In general, qualifying for this type of real estate loan is more difficult than other kinds of commercial loans. Banks want business owners to have good personal credit and a high debt service coverage ratio, which means that your business should generate good revenue so you can repay your loan.
2. Commercial Bridge Loans
This type of loan offers quick financing and is used to bridge the gap until you can secure long-term financing for commercial property.
Commercial bridge loans are more readily available from alternative lenders than credit unions and banks. Down payments can range between 10% and 20% but generally have very short terms—typically six months to three years—and should be paid off in full after maturing. The interest rate on this type of commercial property loan is usually a few percentage points higher than the current market rate.
Since shorter terms can increase the risk of lenders, qualifying for commercial bridge loans can be challenging. Lenders will look for strong credit and a low debt-to-income ratio.
3. Conduit Loans
Conduit loans are securitized commercial property loans, meaning that the lender pooled together different commercial mortgages and sold them to investors on a secondary market.
This type of loan functions differently than traditional commercial mortgages. For instance, paying off your mortgage early can incur prepayment penalty fees. Also, flexible requirements can help business owners who don’t qualify for traditional mortgage loans.
In general, conduit lenders can loan anywhere from USD$1 million to USD$3 million and over USD$50 million. This type of loan has terms of five to 10 years and 25 to 30 years amortization period with loan-to-value ratios of 75%. Interest rates are usually fixed and much lower than rates on traditional commercial property loans.
4. Hard Money Loans
A hard money loan is closely similar to a bridge loan. The main difference is that hard money loans are provided by investors or private lenders.
These have higher down payment requirements and, like bridge loans, they have short terms with higher interest rates and interest-only payments. However, it’s much easier to qualify for a hard money loan than a bridge loan and faster to fund than a traditional commercial mortgage.
5. Soft Money Loans
This is a hybrid between a traditional mortgage and a hard money loan. Unlike hard money lenders that prioritize property value, a soft money lender looks closely at creditworthiness. A higher credit score can help you secure a lower interest rate than those for hard money loans.
A soft money loan is a short-term loan and is quick to close. This is a good option for borrowers who want to quickly move into a property but don’t want to pay higher rates that come with a bridge or hard money loans.
Hopefully, this guide has given you valuable insights on commercial property loans and the different types you can choose from. As with any kind of loan, you want to shop around in order to find the best one that’ll meet your company’s unique needs and help you achieve your business goals.