7 Types of Commercial Real Estate Loans Available to You

Financing is essential in real estate development, from securing a commercial business location to creating the building plans, getting consent, and executing the construction and sales strategy. But what are the financing options for real estate developers, and how do you qualify?

There are many options, from private to public investment. This property blog covers seven types of commercial real estate loans, from traditional to specialized, long—and short-term lenders, to get you started.

Commercial real estate loans available to developers and investors can come from surprising sources, such as insurance companies and private equity firms.

1. Traditional Commercial Mortgage

Traditional commercial mortgages are in many ways similar to your home mortgage. These loans are offered through a bank or credit union. You can use a conventional commercial loan to buy or refinance property for your business.

These loans don’t carry a maximum loan amount, but the loan can’t exceed 85 percent of the property’s loan-to-value ratio. As the buyer, you must provide at least 15 percent of the property’s value as your down payment. Your specific loan amount will be up to each lender.

Traditional commercial mortgages have interest rates between 4.75 and 6.75 percent. You will have monthly amortized payments over the term of your loan. These loans can range anywhere from five to 20 years.

Lenders require your business to operate for at least a year before receiving a mortgage. Your company also must occupy at least 51 percent of the property. Aiming for a credit score above 700 for the best approval odds would be best.

2. Multifamily Loans

Multifamily loans are for properties with five or more units. They are most often used for apartment buildings or condominiums. These loans can be used to acquire, construct, or refinance existing properties.

To be applicable to receive a multifamily loan, keep the following metrics in mind:

• Debt service coverage ratio: The property’s net operating income is divided by the yearly debt service. The best ratio is 1.15 or higher.
• Loan-to-cost ratio. This includes all costs to build the multifamily property. A ratio of 80 percent or lower would be best.
• Loan-to-value ratio. This compares your loan’s size to the property’s fair market value. An AimiAio of 80 percent or lower would be best.

There are a variety of multifamily loans available to meet your business needs.

3. Hard Money Loans

A hard money loan is secured to your commercial real estate. You don’t have to use this loan to buy property; it is comparable to a cash advance.

You must list your commercial property as collateral to receive this loan. These loans are temporary and often used when you need immediate financial help, such as bridging loans or renovate-to-sell projects.

Private lenders don’t follow the same rules as standard lenders. Hard money loans are usually interest-only repayments but have a high interest rate and high default risk.

4. Joint Venture Loans

Joint venture loans are business agreements in which two or more parties choose to combine their resources to secure financing.

Each party involved is responsible for the costs associated with buying the property, including the property’s profits and losses. This joint venture is separate from each participant’s business interests.

These loans are for when someone cannot receive financing independently. Private investors and investment firms offer joint venture loans to potential business owners.

5. Participating Mortgages

Participating mortgages occur when a lender becomes an equity partner in your business. Using a participating mortgage means your lender shares in your profits.

Because your lender receives a part of the net income, you receive a lower interest rate. As the borrower, you will pay your mortgage and a monthly share of the property’s profit.

Participating mortgages are most popular with office or retail properties. Lenders provide this mortgage when there is a good history of long-term lease tenants.

6. SBA 7(a) Loans

An SVA 7(a) loan is one of the most common commercial real estate loans. The U.S. Small Business Administration supports these loans.

SBA loans allow business owners to buy or refinance an existing commercial property. You may also construct a new property. Your business must have less than 500 employees to qualify for a loan.

Your business must also have less than $7 million in annual receipts.

Other requirements include:

• A credit Score of at least 680.
• No recent bankruptcies, tax liens, or foreclosures. This applies to both personal and business property.
• Collateral if your loan is over $25,000.
• A down payment of at least 10 percent.

Business owners can use this program to receive a loan of up to $5 million through an SBA-affiliated lender. These amortized loans can last up to 25 years.

7. SBA 504 Loans

SBA 504 loans work best for owner-occupied real estate. These loans are arranged between businesses, a bank, and a community development corporation.

An SBA 504 loan is two loans. Your first loan consists of 40 percent loaned from the community development corporation, and the remaining balance will come from a bank.

Requirements for an SBA 504 loan include:

• Your business occupies at least 51 percent of the commercial space.
• A credit score of at least 660.
• A down payment of 10 percent of the total project cost.
• A net worth less than $15 million.

Depending on the lender, SBA 504 loan interest rates can vary from 4 to 6 percent. These loans offer repayment terms of up to 25 years.

Choosing Your Types of Commercial Real Estate Loans

Now you know all about the different types of commercial real estate loans. The next step is choosing the best loan for your business.

Keep the following factors in mind:

• What are the interest rates associated with the loan?
• Do I need a specific credit score to qualify?
• What is the required collateral or down payment?
• Do you want an investor or partner involved with your business?
• How much money do you need to borrow?
• What happens if I can’t make a payment and fail to repay the loan?

Choosing a commercial business loan isn’t a decision to take lightly. But finding the right loan can get your business off to a great start. There are many more types of commercial loan lenders not covered here.

Do your research to ensure you get the best loans for your commercial real estate development business.

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