What Are Commercial Real Estate Loans and What Do We Need to Know About Them?
Commercial real estate loan have been around ever since the first commercial properties were sold and bought. Essentially, they are mortgage loans that apply solely to properties designed to provide an income out of only commercial activities. These properties can include anything from a small shop to a large supermarket or production center. What makes commercial real estate loans special is that they are secured against the purchased commercial real estate property. This means that, if you fail to make your mortgage payments, it is possible that you can lose your entire real estate property.
Commercial properties are typically built or purchased by larger investors, who will then rent them out to companies that need them for practical work purposes. An example would be an investor purchasing a large array of commercial real estate lots and then selling or renting them to companies and entrepreneurs who have a good idea about what they’d want to do with those lots. Real estate loans come in whenever a purchase is being made. Whether the investor requires a loan for financing their next large purchases, or a contractor wants a loan to buy their own land or commercial property, there are a few important types of commercial real estate loans that you’ll have to know about.
The first type of commercial real estate loan is the traditional commercial mortgage. Banks will require a set of varying prices in exchange for this loan and, in many cases, the mortgage will apply to anything from multi-family homes to large office buildings and retail centers. Although the typical repayment time for this type of loan is right around the 20 year mark, there can be mortgages with terms of up to 25 years, as well as those with terms as short as 10 years, but with larger individual payments and lower interest rates. To qualify for traditional commercial mortgages, companies will need to have good track record and the borrowers in charge of the loan will also need to have good personal credit and a low debit service ratio.
SBA 7(a) and SBA 504 are two special commercial financing programs known as Small Business Administration loans. These loans are used to buy buildings, land or owner-occupied real estate, and they will typically allow you to borrow up to $5 – $5.5 million at a time, depending on your income, credit and several other important factors such as the property you need it for or the repayment plan you choose. For 504 loans you will be responsible for making a down payment of at least 10% of the total amount that the property is worth.
There are other notable types of loans as well, including Conduit/CMBS loans, hard money loans, soft money loans and commercial bridge loans. The latter is a very popular and practical type of commercial real estate loan, since it can be used to “bridge the gap” between a short term loan and a longer term one, especially when you don’t immediately have the necessary stability to get a long term commercial loan right away.