Structuring a commercial real estate deal is a tall order, especially when it comes to securing financing, as commercial mortgages are structured differently than a traditional residential mortgage. That’s why it’s important to understand the 10 major different types of commercial real estate loans, their benefits, and their major attributes. Let’s take a closer look at 10 types of commercial real estate loans one by one.
10 Types of Commercial Real Estate Loans
While there are numerous types of commercial real estate loans you can pursue, 10 are widely considered to be the best choices for purchasing long-term real estate investments, short-term business ventures, and everything in between.
1. SBA Loans
SBA or Small Business Administration loans are excellent choices because they are government-backed. In essence, these small business loans are guaranteed by the government, making them very safe for commercial lenders. In turn, this results in lower interest rates for borrowers.
SBA loan programs like the SBA 504 loan are perfect choices for commercial real estate purchases due to their low-interest rates, lengthy amortization periods (thus lowering how much you have to pay every month), and availability. However, note that regular real estate investors don’t qualify for SBA loans.
Instead, you have to have a business that meets certain requirements, such as:
- Being for-profit and having a cash flow
- Have equity invested from you, the owner
- Have a demonstrable need for financing
- Not have any outstanding debt to the US government
If you qualify, you can pursue SBA 7(a) business loans from the government, which may provide funding in amounts up to $5 million. Or you can pursue 504 loans, which are long-term, fixed-rate financing offers from the SBA. These also provide up to $5 million in loan amounts, which you can put toward any major assets that may promote the growth of your business.
2. Conduit Loans
Conduit loans, also called commercial mortgage-backed security (CMBS) loans, are commercial mortgages that are pooled with other similar commercial loans and sold on secondary stock markets to institutional investors. All of the loans in a CMBS pool serve as collateral for each other, minimizing risk and making these loans accessible for many entrepreneurs or business owners.
Conduit loans, due to this setup, usually offer lower fixed interest rates compared to traditional commercial real estate loans. They also usually offer prepayment in the form of defeasance, which means you don’t have any minimum prepayment requirement.
3. Commercial Mortgages (From a Traditional Bank)
Commercial mortgage loans from a traditional bank are standard loan instruments that are exactly what they sound like: mortgages for commercial buildings instead of residential real estate. Most commercial loans offered by traditional banks will have a similar repayment schedule to a residential loan, ranging from 15-20 years, but they also offer terms as short as 5 years.
However, getting approved for a commercial loan through a traditional lender will require at least a 20% down payment, along with an excellent credit score and healthy personal and business financials. Additionally, if the commercial property will be owner-occupied, the bank may require you to be in business for at least 1-5 years.
Commercial mortgages from traditional banks are a good option for both small business owners and real estate investors. They do require an excellent borrower profile and having an established relationship with the bank you’re applying with may increase your approval odds.
4. Bridge Loans
Then there are bridge loans offered by private lenders: short-term financing solutions that are meant to be “bridges” between two different financing states. For example, imagine that you have the opportunity to jump on a prime piece of commercial real estate for your growing business.
However, the process of getting approved for long-term financing with a bank is taking more time than anticipated. In the meantime, some other investor could sweep in and take the property if you don’t purchase it right away.
A bridge loan could be the solution. With a bridge loan, you’ll be able to close as quickly as a cash offer could. Bridge loans are also interest only loans which can help you keep your expenses low while you secure longer term financing or sell the asset.
Bridge loans are asset-based loans, meaning that the underwriting of the loan focuses more on the quality and performance of the asset than the borrower’s personal income and credit score.
This allows bridge lenders to streamline the loan process and work with a variety of different investors like foreign nationals and self-employed business owners.
5. Commercial Refinancing / Commercial Cash-Out Loans
Commercial refinancing loans are secondary loans you apply for after you already have an outstanding loan on commercial properties like office buildings. When you refinance your loan, you renegotiate the terms of the loan with the same lender or with a new lending institution. In the latter case, you’ll use the new loan’s funds to pay off your current loan, then make monthly payments to your new lender under the terms of that agreement.
Refinancing your commercial loan can be a good option if you can secure a lower interest rate, lower your monthly payment, or if your existing loan is reaching maturity soon.
If you own your commercial property free and clear, meaning you don’t have a mortgage on it, you can use a commercial cash-out loan to tap into your property’s equity. You can then use your cash-out proceeds to make improvements on the property, pay off other debts, invest in a new property or new venture.
While there are many cost-saving benefits to refinancing your commercial property, keep in mind that there are still upfront costs associated with refinancing such as closing costs, appraisal fees, etc.
6. Commercial Construction Loans
Most commercial loan options mentioned so far will provide the borrower with the full loan amount upfront. However, with a commercial construction loan, the borrower will receive the loan amount in increments known as a draw schedule. The borrower will receive funds from the lender as they pass specific milestones in their construction process.
A borrower can use construction loan proceeds to buy the land or they can secure the construction loan after the land has been purchased. The latter is more common as a construction loan can take time to qualify for and a good piece of land may not stay on the market long enough to use your construction loan proceeds for the purchase.
On a construction loan the borrower only pays interest on the loan proceeds they have received. For example, if they are approved for a $750,000 construction loan but have only received $200,000, they are only paying interest on the $200,000.
Since the loan is tied to a draw schedule, the lender is often very involved in the construction process and requires routine inspections to be done to ensure the project is hitting each milestone.
7. Hard Money Loans
Commercial hard money loans are short-term real estate loans offered by private lenders with varying repayment terms, which can range from one year to four years. Hard money loans are based on collateral that you provide in the form of physical assets, like vehicles, business equipment, or other commercial real estate.
Hard money loans can be advantageous for real estate investors, especially if you don’t have a good credit score or need financing quickly. Hard money loans are interest only and offer up to 70% financing and interest only monthly payments with a balloon payment due at maturity.
8. Commercial Real Estate Blanket Loans
Commercial real estate blanket loans are loans intended to cover the purchasing of multiple real estate properties at once. For instance, if you need several buildings in the same shopping complex or want several buildings across town for multiple stores in your enterprise, you might be best served by a commercial real estate blanket loan.
Instead of having multiple mortgage accounts, a blanket loan puts all your properties under one mortgage, making it easier to manage payments and can reduce your origination fees and upfront costs associated with your loan closing.
If you have built significant equity in your portfolio, a blanket loan can help you use your existing equity to purchase another investment property. This is referred to as cross-collateralization, and is a loan product offered by private money lenders.
It’s important to note that if you default on a commercial real estate blanket loan, you are at risk of losing all properties tied to that loan. Additionally, if you plan to sell one of the properties tied to the blanket loan before the loan matures, your lender will require that the loan amount stays at or below their loan to value (LTV) limits after the property is removed from the mortgage.
Make sure to work with an experienced commercial loan advisor to ensure your blanket loan is structured to fit both your short-term and long-term investment goals.
9. Multifamily Loans (5+ units)
A multifamily with 2-4 units is considered a residential asset and can qualify for the same mortgage options as a single-family home purchase transaction. However, when a multifamily is 5 units or more, they are considered commercial properties, often referred to as apartment or condos buildings, instead of being referred to as a duplex or triplex.
Multifamily projects that are 5 or more units usually require financing that offers higher loan limits, ranging upwards of $5 million and can be difficult to qualify for as the lender will require documentation that verifies the property has sufficient cash flow.
A commercial loan for a 5+ unit multifamily property can be offered by both traditional banks and private lenders. Both will focus on the asset’s quality and ability to produce income. However, a traditional bank may also want the borrower to have an excellent credit score, sold personal financials, and preferably an established relationship with the bank.
The good news is that the multifamily market has become extremely popular and we’re seeing more real estate and mortgage brokers specializing in this asset class. This makes it easier to partner with an advisor who can guide you through your multifamily investment process and connect you with the right lender for your investment scenario.
10. Commercial Vacant Land Loans
In many markets, land is a limited resource and can have a high return on investment since it is often cheaper than buying a completed asset. However, most land deals are cash deals because very few lenders have the risk appetite to lend on vacant land or an incomplete project.
Securing a commercial vacant land loan can be achieved through a private lender that specializes in land loans. A commercial vacant land loan from a private lender is often short-term, ranging from 12-24 months. Since land deals are risky, lenders will often require the borrower to put down a larger down payment, usually 45-50% of the purchase price.
This is an ideal option for an investor who wants to purchase land and sell it to a developer, or an investor who wants to build on it themselves once they secure a construction loan. Since this loan is short-term, this is not a good option for land bankers, or investors who want to hold onto the land for a long period of time and wait for it to appreciate in value.