A commercial real estate loan is a financing product specifically designed to help us, as business owners, to buy or renovate commercial properties or to refinance the existing mortgages. In general, commercial properties include any real estates that the owners use for business activities, like a shopping center, an office building, a physical store, a motel, a theater, a manufacturing plant, or others. Business owners should know that commercial real estate loans have significant differences from the conventional ones even though both have the same functions to act as mortgages.
The ratio is by dividing the loan’s amount by the property’s value. When it comes to commercial real estate loans, typically, the lenders use this ratio to decide the amount of money that a business owner can borrow. According to the National Association of Realtors, for commercial real estate mortgages, the lenders usually desire this ratio to be around 75 – 80%.
Personal Guarantee and Non-Recourse Loans
In general, whether it is a conventional mortgage or a commercial real estate one, the lenders will make the property as a collateral to the debt. Besides, when it comes to commercial real estate mortgages, depending on the financial history and the scores of the businesses, the lenders may also ask us for a personal guarantee on the debt. Then, we need to agree on personal liability to the monthly payments; otherwise, the lenders may take action to use the properties against us as a means to recover the mortgages, which are known as non-recourse loans.
The Common Loans for Commercial Real Estate
The Permanent Loan
Similar to a conventional mortgage loan, it is the first mortgage on commercial real estate. However, the permanent loan is available for short-term financing, and it has an amortization schedule with a repayment term of 5 years or more.
The SBA Loan
The United States Small Business Administration offers guarantees to some commercial real estate loans, and these loans are known as SBA loans, which include SBA 7(a) as well as SBA 504 Loans.
The Bridge Loan
This kind of loan is a short-term one with a repayment term of six months to three years. Bridge loans are typically used by us while waiting for long-term mortgages or refinancing.
The Hard Money Loans
These loans come from private companies or individuals rather than banks, and the mortgages have a term of three to 36 months.
The Owner Financing
It lets us buy commercial real estate by paying the sellers directly rather than getting loans.
For most commercial real estate mortgage loans, it expects the down payment to be at least 20% of the loan.
Interest Rates and Fees
When it comes to commercial real estate loans, the interest rates are higher than the traditional ones. According to the National Association of Realtors, the average interest rate for commercial real estate mortgage is 5 – 7%. Also, it expects to have some closing costs, including application fees, origination fees, appraisal fees, and others, which could amount to about 1- 2% of the total amount of the loan.
For commercial real estate loans, in general, a repayment term comes in 5 – 20 years. Nevertheless, for some short-term loans, it could be due as soon as within a year. Besides, it is less common for the amortization schedule to be matching up with the repayment terms when it comes to commercial real estate mortgage. As a whole, if we want to pay off our commercial real estate loans in advance, we may have to pay certain fees or penalties as follows:
- Prepayment penalty
- Interest guarantee