Commercial real estate loans can be used to buy and renovate owner-occupied property for business use. They can also be used by real estate investors to purchase income-producing real estate such as mixed-use, retail, industrial, and office buildings. Loan terms for commercial real estate vary based on the credentials of the borrower, what the loan will be used for, and the type of property being financed.
Owner-Occupied Commercial Real Estate Loans
Commercial real estate loans for businesses looking for their own space typically require an owner-occupancy ratio of at least 51%. There are two main types of owner-occupied loans, as described below.
SBA 7(a) Loan
Used by borrowers that have been in business for at least two years and who are looking for a long-term owner-occupied loan. Loan amounts go up to $5 million with loan terms of up to 25 years. Lenders require a credit score of 680 and a DSCR (debt service coverage ratio) of at least 1.25.
CDC/SBA 504 Loan
Used by borrowers who have been in business at least three years and who are looking for a long-term loan. Unlike an SBA 7(a) loan, there’s no loan maximum to a CDC/SBA 504 loan, but the loan amount can only be 90% of the property purchase price. Loan terms range from 10 – 20 years, require a credit score of 680 and a DSCR of 1.25.
Interest rates on SBA loans are based on prime plus 2% – 3% or more.
Commercial Real Estate Loans For Investment Property
In addition to SBA loans, there are a variety of commercial real estate loans available to both investors and business owners.
Long-term fixed-interest commercial real estate loans are usually amortized over 20 or 30 years, but with a term rate of between 5 and 10 years. At the end of the loan term a balloon payment is due, and the loan must be paid off or refinanced. The monthly payment of principal and interest remains fixed. Interest rates typically range between 4.75% and 6.75%.
Borrowers who use an interest-only loan for commercial real estate expect a large capital payout at a future date. Monthly payments are only based on the smaller interest amount and have short terms of between three and seven years. At the end of the term, a balloon payment is due for the entire principal amount borrowed. Interest rates vary.
Investors and business owners use a refinancing loan to take advantage of lower interest rates or to pay off the balloon payment due from a traditional mortgage or interest-only loan. Refinancing an existing loan can help fund property improvements or expansion and boost cash flow and property yield. Interest rates are similar to those in traditional mortgages.
Hard money loans have short terms of 6 to 24 months, interest rates of up to 18% or more, and costly up-front fees compared to traditional loans. Funding for these loans comes from private investors. Loan amounts are based on the value of the property rather than the credit worthiness of the borrower. Hard money loans usually have a low LTV (loan-to-value) of around 50%.
Borrowers use construction loans to fund the development of new construction or for significant improvement of an existing building. Loan terms are short, ranging from 18 to 36 months. Bridge loans are often used to pay off construction loans until traditional long-term financing can be arranged.
A bridge loan is used by borrowers to “bridge the gap” between paying off an existing construction loan for developing or significantly renovating a property and taking out a longer-term traditional loan. Bridge loans are a ‘softer’ form of hard money loans. Loan terms can go up to three years, with interest rates between 6% and 9%, and LTVs of about 80%.
Commercial real estate investors use blanket loans to ‘cover’ multiple properties under a single financing arrangement. Terms on blanket loans vary based on the lender, borrower, and property types. Blanket loans can offer convenience and flexibility for the borrower. For example, allowing two properties from a six property portfolio to be sold without penalty. However, blanket loans can be difficult to obtain and may contain default penalties that put all of the properties under the blanket loan at risk if only one underperforms.
The Bottom Line On Commercial Real Estate Loans
In the world of commercial real estate lending there’s literally something for every type of borrower and property. Unlike non-commercial loans, commercial real estate loans can be customized to meet the unique deal-specific needs of both the borrower and the lender:
- SBA 7(a) and CDC/SBA 504 loans for owner-occupied property,
- Traditional, refinance, and construction loans for CRE investors and business owners,
- Interest-only, hard money, bridge loans, and blanket loans for creative commercial real estate financing.