Types of Commercial Real Estate Loans
The final piece to our three-part series…what types of commercial real estate loans are available and what type should you get? Below we’ve outlined 5 of the most common commercial loans, but this list is in no way exhaustive. To find the one that will work for you, we suggest you speak to a commercial lender first. They will know what loan products would best fit your situation and the commercial property you wish to purchase.
5 Common Commercial Real Estate Loans:
- Traditional Bank Loans
- SBA Loans
- Bridge Loans
- Construction Loans
- Hard Money Loans
Traditional Bank Loans
We’ve already discussed some of the primary terms involved in a traditional bank loan in Part I of this series. Traditional bank loans can be qualified into 2 main categories – Conforming and Non-conforming.
Traditional Conforming Loan
A conforming loan is originated by a bank but conforms to standards as set out by the federal government. Often, these loans that meet the conforming requirements are sold in the secondary market and held by a different company than the one that originated it. These loans can be bought by Freddie Mac and Fannie Mae, among other third-party purchasers, since they adhere to a certain set of rules and regulations.
Conforming loans limit some of the flexibility that many investors and business owners need in order to purchase a commercial property. While the rates are often better in conforming loans, they are also much harder to get.
Portfolio Term Loan (Non-Conforming)
A portfolio term loan is originated by the bank and held by that same bank for the life of the loan. Because these loans are not intended to be sold on the secondary market, the bank can offer much more flexible terms for the borrower. They do not need to meet the stringent requirements that the government has set out for conforming loans, thus they are considered “non-conforming”. Portfolio term loans are the most common type of commercial loan used when financing through a bank.
Traditional Bank Loans – Average Structure
Term: 10 years
Interest rates: 5 – 7%
Avg LTV: 70-80%
Max loan amount: $1,000,000
The U.S. Small Business Administration (SBA) assists business owners and investors with commercial financing through two loan programs – the SBA 7(a) loan and the SBA 504 loan. SBA loans are similar to FHA loans in the residential market; just as the Federal Housing Administration backs or guarantees FHA loans, the Small Business Administration guarantees SBA loans. These loans are still given through a commercial lender; however, they are backed by the SBA, providing the lender with more security and opening up more flexibility for the loan.
SBA 7(a) Loan
The SBA 7(a) loan is for owner-occupied properties (at least 51% OO). This can be used to purchase buildings or land, construct new property, or even renovate existing properties. These loans have a typical max term of 25 years (much longer than a traditional bank loan at 10 years) and they are fully amortized. The LTV on these loans is normally 85%, with a $5,000,000 max on loan amount.
SBA 7(a) – Average Structure
Term: 25 years
Interest rates: 5.50% – 11.25%
Avg LTV: 85%
Max loan amount: $5,000,000
SBA 504 Loan
The SBA 504 loan is also for owner-occupied properties (again 51% or more) and is often helpful for first-time commercial property owners. This loan can be written with as little as 10% down, and the interest rate is usually lower than most other types of commercial real estate loans.
Its unique structure allows for a greater maximum loan amount. 504 loans are composed of two different loans – one from a Certified Development Company (CDC) for up to 40% and the other from a third-party lender (bank or commercial lender) for 50% or more. The CDC limit is $5,000,000, which means that these loans can be well over $10,000,000 when combined with the third-party lender. The 40% financed by a CDC company is the portion of the loan that is backed by the SBA.
SBA 504 – Average Structure
Term: 25 years
Interest rates: 2.231 – 2.399%
Avg LTV: 90%
Max loan amount: $5,000,000 (SBA Max)
Commercial Bridge Loans
Commercial bridge loans “bridge the gap” between immediate cash flow needs and long-term financing. Bridge loans provide a competitive edge for a buyer looking to close on a property immediately. Because of this, bridge loans often have less favorable terms (higher interest rates, a shorter term length, etc.). Many of these terms extend from as little as 6 months to a max of 3 years.
The purpose of these loans is to allow the deal to close quickly while the buyer secures long-term financing. Because they can be riskier for the lender, bridge loans are often harder to obtain. Strong credit and a low DTI are often necessary for getting approval on these loans.
Bridge Loans – Average Structure
Term: 6 mos – 3 years
Interest rates: 4.2 – 13.2%
Avg LTV: 80%
Avg loan amount: $1,000,000+
Construction loans are used to finance the construction or renovation of a commercial property. These loans are different in their payment allocation, as the lender doesn’t deliver one lump sum for the entire project. The project is segmented into stages, with a proposed amount of funds needed for each stage. The distribution of the funds are then metered out according to the progress on the property.
Construction loans often come with a higher interest rate; however, when building or renovating, this is one of the few options available. SBA loans can also be used for construction projects. Talk to your bank or commercial lender about the options available.
A long-term commercial loan can most always be obtained after the project is completed. This allows the owner to restructure with a loan that has more favorable terms.
Construction Loans – Average Structure
Term: 1-3 years
Interest rates: 4.75 – 9.75%
Avg LTV: 75%
Avg loan amount: $1,000,000 (SBA Max)
Hard Money Loans
For some, hard money loans may carry a negative connotation, but they offer a great advantage to many small business owners – namely speed and efficiency. These types of loans are given by private lenders or investors and may have fewer hoops to jump through.
They do come with short terms, higher interest rates, and require more money down; therefore, they are often used in a similar fashion to bridge loans. The borrower uses them for quick financing in order to close a deal. They then may seek long-term financing with better terms after the deal has closed or their personal financial situation has improved.
Hard Money Loans – Average Structure
Term: 1 year
Interest rates: 12-18%
Avg LTV: 60-80%
Avg loan amount: $150,000+
There are many more types of commercial loans than what we’ve discussed here, such as USDA Business & Industry Loan, a Conduit (CMBS) Loan, and more. Talk to your commercial banker to learn more about each type of CRE loan.
For more questions about the real estate process and how Peak CP can help you, call us at 719.227.9987.
Disclaimer: The information contained in this article is not intended to provide legal or financial advice. Please speak to a commercial banker or financial adviser for professional guidance.