Different types of commercial real estate loans

Author Ivan Smiljanic Read bio
Tags: commercial real estate finance loans
Date: November 1, 2020

What is a commercial real estate loan? Commercial property owners usually need mortgages when they want to construct buildings. After the construction process is completed, they often need some additional commercial real estate financing to keep them in mint condition and fully leased.

There are many types of commercial real estate loans, and these are the most common ones.

Hard money loans

In order to qualify for a hard money loan, an owner must file the commercial real estate property as collateral, even in cases when the loan is being used to save that property. Hard money commercial real estate financing is usually offered by private money lenders who do not have to meet the same standards as mainstream lenders.

Hard money commercial property loans are temporary in nature, they are not a long-term solution and are only offered in situations when time is of utmost importance. They come with certain risks, and as expected – a high-interest rate.

Bridge loans

Commercial real estate financing through bridge loan is basically a softer version of a hard money loan, with lower interest rates, usually ranging from 6.5 – 9%, longer terms (up to 3 years), and a short wait time for funding (15 – 45 days). In order to qualify for a CRE bridge loan for any traditional bank, business owners must have a credit score of 650 minimum. 

Short-term real estate investment loans like this are often chosen as loans for renovation work and construction before a much bigger loan.

SBA loans

There are two types of SBA real estate investment loans: the SBA 7(a) loan and the SBA 504 loan. Despite its names, the SBA does not really make these loans but instead works with approved lenders that follow their guidance in commercial real estate lending. Qualification requirements for these types of real estate loans are strict.

SBA 7(a) real estate investment loans

SBA 7(a) loans are the most common SBA loans. They are usually used for helping businesses purchase or refinance owner-occupied commercial properties, up to a sum of 5 million. SBA 7(a) loans are most commonly used for working capital but can be used to purchase commercial real estate in some cases.

To qualify for this type of commercial real estate financing, the owner must put down a minimum of 10% of the purchase price. The owner also must have a credit score of 680 and more, and experience in the business of at least 3 years. 

SBA 7(a) loans are generally amortized over a 10-25 year period, with interest rates ranging anywhere from 5% to 8.75%. 

SBA 504 loans

SBA 504 loans are very similar to SBA 7(a) loans, with the exception of SBA not having a minimum loan amount. This commercial property loan can be used for up to 90% purchase price of the property, no matter what the size of the deal is.

SBA 504 loan terms are usually 20 years when used to purchase commercial real estate and have interest rates ranging from 3.5% and 5%. The owner must occupy a minimum of 51% of the property in order to qualify for this loan.

Participating Mortgage

Under a participating mortgage, the lender has the permission to share in part of the revenue, generated by the commercial property involved. The lender then receives a monthly mortgage payment with interest for his commercial real estate financing, along with a share in the property’s rental income or in some cases sales proceeds.

This option is popular among office and retail properties, in situations when well-known and stable tenants have already signed long-term leases.

Duration of different types of loans for commercial real estate

The duration of these different types of commercial real estate loans can range from 5 to 25 years. The longer the term, the bigger the risk for the bank or the private money lenders, and also – the harder it is to qualify for the loan.

Keep in mind that many loans come with penalties for making extra principal payments or paying the balance early. 

Choosing the right commercial real estate lending

The right type of commercial real estate loan will be dependent on the owner’s financial history, the type of real estate property, goals, and what is the intention of the loan.

In the process of deciding which loan is the best option, and the most affordable one, it’s smart to talk to multiple lenders and get informed thoroughly, especially when it comes to private money lenders.