Types of commercial real estate loans

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Commercial Real Estate Loans cater to business entities and corporations unlike residential real estate loans which are designed for the individual. These loans cover the acquisition, ownership, and development of establishment for business purposes. These types are loans are given out to finance properties like retail malls, shopping centers, industrial buildings, hotels, restaurants, medical facilities, etc. However, 51% of the physical property must be owned by the borrower before applying for a commercial real-estate estate loan through a bank. The terms and rates that apply towards availing commercial estate loans differ from property-to-property. For example, the repayment tenures may vary from 5 to 20 years and down payments on commercial holdings may fluctuate between 10% to 50% or even more.

Types of Commercial Real Estate Loans

There are different types of commercial real estate loans available based on the borrower’s requirements. Some of the common ones are listed below:

Traditional Commercial Mortgage:

A Traditional Commercial Mortgage applies to properties like shopping centers, office buildings, multi-family residences, and industrial buildings. In most cases, the property has to occupy by the owner and the commercial loan is secured in nature. Terms of this loan type vary widely based on lender requirements. For example, the loan tenure may be 25-years with loan-to-value ratios of 80% while in other cases, it may be lent for a period of 10 years at a loan-to-value ratio of 65%. Banks are careful in lending Traditional Commercial Mortgages and select candidates who have a clean credit profile, a profitable business, and a low debt-service coverage ratio.

SBA 7(a) Loan:

A Small Business Administration’s flagship loan (7(a) loan), is used for buying lands, buildings, constructing new holdings, and renovating existing properties (subject to real estate being owner-occupied). Borrowers can avail amounts up to USD 5 million through SBA-recognized lenders at floating, fixed, or combination interest rates. The repayment tenure lasts up to 25 years and this type of loan is fully amortized, implying that each monthly payment will be the same until the loan is repaid.

SBA 504 Loan:

SBA 504 Loans cater specifically to owner-occupied real estate options and long-term equipment purchases. 504 loans are categorized under two loan types: 1. From Certified Development Company (CDC) for up to 40% of the loan amount and 2. From the bank for 50% or more of the loan amount. The borrower would be responsible for paying at least 10% as down payment. The CDC portion of the loan may increase up to ranges of USD 5 million to USD 5.5 million, thus indicating that the entire project being financed is no more than $10 million in terms of value. Interest and treasury rates are determined and fixed after the loan application is received. In 2017, these rates have fluctuated between 4% and 5%. Banks offer variable interest rates and these loans are fully amortized as well.

Conduit/CMBS Loans:

Conduit loans are commercial mortgages combined and sold to investors in secondary markets. These loans have standardized documentation and underwriting requirements, subject to loan securitization and fixed-rates. Most conduit loans have a time period of 5-10 years with 20-30 years of the amortization period. Monthly payments remain the same until the completion of tenure and the interest rates are fixed, usually being lower than that of traditional mortgages.

Commercial Bridge Loans:

Like the name suggests, Commercial bridge loans are used to “bridge the gap” until long-term finances are secured for commercial properties. In certain cases, the lender making the long-term loan will also make the bridge loan for the property. Most bridge loans are issued for short tenures which range between 6 months-2 years. Qualification criteria differ from lender to lender. These loans are also used to finance property renovations, unlike traditional mortgages.  An advantage of these loans is relatively low down payment requirements, which range between 10%-20% in comparison to many traditional commercial mortgages that levy 20%-35% down payment charges.

Soft And Hard Money Loans:

Hard money loans are issued to private companies and require higher down payment charges. Similar to bridge loans, hard money loans have short lending tenures, high interest percentages, and interest-only settlements. They are easier to qualify than your traditional mortgages and provide speedy asset-based financing options. Hard money loans are often viewed as a last resort financing option for property owners who require capital against equity in real-estate holdings.

Soft money loans are an amalgamation of hard money loans and traditional mortgages. Unlike hard money lenders, soft money lenders put greater emphasis on creditworthiness and strength of loan applications which translate to lower interest rates, lesser down payment fees, and longer repayment tenures in contrast to hard money lenders. Eligibility requirements are flexible in the case of soft money loans. Soft money loans are a suitable option to borrowers who want to migrate to a new property without having to end up paying high interest rates.