When it comes to purchasing real estate, a loan from a bank or other financial institution is generally necessary for the purchaser. In commercial real estate or CRE, however, this works slightly differently. Commercial real estate is defined as a property that produces income used solely for business purposes. Some examples include offices, shopping malls, and retail. We go over building classifications in a separate post.
Even if you’re just planning on renovating a property, you still need to know about commercial real estate loans. This post answers common questions about CRE lending: How long are commercial real estate loans, what are common types of commercial real estate loans, and what are typical CRE loan terms?
Commercial Lending Requirements
A commercial real estate loan is made to a business entity rather than an individual person as with a home loan. Commercial real estate loans also have shorter terms, usually around 5-10 years, rather than the 20-30 years that one would expect from home loans.
If a business doesn’t have a credit rating or financial credentials, the owners of the business entity or investors may have their credit history assessed and the lender will require them to guarantee the loan. Investors will need to have good credit in order to secure a commercial real estate loan. Good credit is a score of 670 or higher (Nerdwallet), and you'll likely need to show strong annual revenues.
Within the commercial real estate space there are a few different types of loans available. Understanding the different options available to businesses is essential if you’re looking for a loan for investing, developing, or running a business at a property.
Types of CRE Loans
Commercial Mortgages
Broadly speaking, commercial mortgage is a blanket term that covers most loans for commercial properties. Standard, conventional commercial property mortgages will look a lot like home mortgages, just with a much shorter term.
This means around a 25% down payment with a fixed mortgage rate anywhere from 5 to 30 years. These types of loans are most commonly used by investors buying a property asset with a fixed cash flow. The lender secures the loan by placing a lien against a property. A lien, as you may know, is a legal claim against a property.
Commercial Bridge Loan
A short-term, high-interest-rate commercial mortgage is called a bridge loan. This is because the loan is designed for a commercial property that doesn’t yet qualify for permanent financing. This type of loan bridges the gap between their current state into a better, future state.
Bridge loans generally range from 1 to 3 years and are interest only with rates from 6% to 12%*, backed by collateral. Investors can use them to offset significant costs, such as renovations that may help them make more money through leasing or reselling the property.
Commercial Hard Money Loans
Hard money loans are a form of bridge loans with higher interest rates for a higher degree of risk. These loans are most commonly used in high-risk situations such as bankruptcy or when a business needs to quickly purchase or refinance a commercial property. These are the highest-fee loans available.
Hard money loans can have interest rates from 10% to over 20%* and should only be used when an investor or business needs to move quickly.
SBA 7(a) and 504 Loans
These loans are government-backed small business loans provided by a Small Business Administration (SBA) lender.
An SBA 7(a) loan is used for businesses purchasing, remodeling, refinancing, or constructing a property up to $5 million. This loan will finance up to 100% of a property’s value. The business will need to put down 10% of the property’s purchase price and be at least 51% owner-occupied.
An SBA 504 loan can only be used for business machinery, equipment, or property. These loans finance up to 90% of a property’s value. The loan term is generally 20 years with interest rates between 3.5% and 5%* or higher.
Mezzanine Loan
Mezzanine loans are short-term loans meant to be an additional layer of financing on top of a traditional loan that’s already been taken out. A mezzanine loan is meant to be used when the investor or business has additional purchases or costs they need to fulfill with a loan.
A mezzanine loan has an interest rate of anywhere from 9% to 16% and usually has terms no longer than 5 years.
*The information in this article is for informational and educational purposes only and should not be taken as financial or legal advice. Interest rates for commercial real estate loans are just as sensitive to economic changes as consumer loans are. See “Downloads and Resources” on the Small Business Administration website for the latest CRE rates.