Commercial Real Estate Loans: Guide

Whether you’re a subdivision developer embarking on a new project or an office building owner looking to refinance, chances are you’ll need a commercial real estate loan. Commercial real estate loans work differently than residential mortgages in terms of underwriting, structure, interest rates and fees, and there are several types to choose from. Here is a guide.

What is a commercial real estate loan?

A commercial real estate loan is typically used to purchase, construct, rehabilitate or refinance commercial, industrial and other non-owner-occupied property. That can include an office building, multi-unit rental building, medical facility, warehouse, hotel or vacant land on which to build one or more of these types of properties. Commercial mortgages can also be used to buy and develop land on which single- or multi-family homes will be constructed and sold.

Commercial real estate loans are secured by commercial property. Unlike a residential mortgage, the underlying asset is not a primary residence. Instead, the commercial lender underwrites the income — such as rent from tenants — and expenses that the property will generate.

“Ideal candidates to pursue a commercial real estate loan include borrowers who either own the property and are seeking to lower their interest rate by refinancing or seek to obtain capital through a cash-out refinance,” explains Chris Moreno, CEO of GoKapital, Inc., based in Miami. “Also, investors who are interested in working with commercial properties and diversifying their portfolio should explore this type of loan option. Furthermore, business owners who rent a location and qualify for a commercial real estate loan may be better off obtaining financing to purchase their business property.”

Commercial real estate loan types

There are several different kinds of commercial real estate loans to choose from:

• Conventional commercial real estate loan, offered by banks and other lenders, with terms ranging from five to 30 years, interest rates as low as 3.5 percent and a minimum down payment of up to 20 percent
• Commercial bridge loan, offered by various lenders, as a means to bridge the financing gap until longer-term financing is found; terms usually span up to two years, with only a 10 percent to 20 percent down payment often required
• SBA 7(a) loan for up to $5 million over a max term of 25 years
• SBA 504 loan, comprising both a Certified Development Company (CDC) loan portion for up to 40 percent of the loan plus a bank loan for up to 50 percent of the loan that collectively can max out at $5 million
• CMBS or conduit loan, part of a pool of commercial real estate loans (a commercial mortgage-backed security, or CMBS) sold on the secondary market; most conduit lenders finance a max of $3 million, and terms usually span five to 10 years with an amortization of 20 to 30 years
• Hard money loan, which works like a bridge loan but is typically offered by a private lender

“If you’re looking to close on a transaction quickly or have less-than-perfect credit, you’ll probably have to work with a private lender,” Moreno says.

Commercial real estate loans are also categorized by asset classes. These include apartment buildings, office buildings, medical buildings, industrial buildings and multi-unit versus single-tenant assets.

“All of these are evaluated differently by the lender,” explains Barry Saywitz, president of The Saywitz Company, a commercial real estate brokerage based in Newport Beach, California. “The value of the asset will be determined by the appraisal required, and the appraisal will be determined based on the quality of the tenant, their credit, payment history and rental rate, and the condition of the building and expenses involved.”

Commercial vs. residential loan

Like a residential mortgage, a commercial mortgage can be used to purchase or refinance a property. Commercial real estate loans, however, typically come with a shorter term than a residential…