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Commercial Real Estate Loans: A Complete Guide



In business, success often entails being able to grow your company. Aside from growing your sales and customer base, this can also apply to renovating a property you own, purchasing real estate, or even refinancing your real estate debt. While this may be thrilling, it can also be stressful. After all, this is often one of the biggest commitments you can make. In this instance though, you have commercial real estate loans to depend on.


Investing in commercial real estate is one of the most lucrative investments you can make. And there is plenty of commercial real estate financing available out there with affordable rates and agreeable terms to help you jump in on it. Before you settle on one, however, it’s best for you to understand the ins and outs of commercial real estate loans.


What Are Commercial Real Estate Loans?

Commercial real estate (CRE) loans provide business owners the means to establish income-producing properties that are used for business. It is this aspect of it that separates it from residential real estate loans. They are often likened to each other, however, especially since they’re both secured by a lien on the property. If you default on your loan, lenders can seize your property to settle your balance.


With commercial real estate, office buildings and retail outlets are often more expensive than their residential counterparts and understandably so. Once you’ve secured a commercial property, you can expect a steady stream of passive income from various sources. You have the most common which are tenant rents and parking and service fees. There are also proceeds from sale, tax benefits, depreciation, and operating expense recovery to name a few more.


How Does It Work?

The main purpose of commercial real estate loans is for the purchase, renovation, development, or construction of commercial properties. You can also use it to refinance a loan on an already existing commercial property.


Given that these loans often involve big numbers, there’s a bigger risk for creditors. Because of that, you need to undergo more scrutiny more than any other loan and have detailed business plans in place. Lenders would also require between 15% to 35% downpayment.


Additionally, some lenders would also require you to occupy at least 51% of the space so make sure to read the fine print carefully.


Unlike residential loans, commercial real estate loans also have a different set of repayment terms. Generally, commercial real estate loans have shorter repayment terms. Some short term real estate loans can go as low as 5 years while some long-term loans can go up to 20 years. Depending on the lender, these loans may also have higher interest rates.


Types of Commercial Real Estate Loans

There are several types of commercial real estate loans but here, we’ll only be focusing on the most relevant for small business owners.


SBA loan for commercial real estate

With the difficulty of securing traditional loans, the SBA is often the saving grace of most small business owners. The 7(a) is one of the most commonly sought out because of its wide range of applications. Oftentimes, it is granted to small business owners to support their capital but it can also be used for investing in commercial real estate. You can often find the lowest interest rates with this one and a maximum amount of up to $5 million. The repayment term is usually around 10 to 25 years.


Aside from that, there is also the CDC/SBA 504 loan. This one has a more set purpose and should only be used for the purchase of commercial real estate properties. One of the biggest advantages of this is that there is no maximum limit. 10% will come from you, 50% will come from a lender, and the remaining 40% will come from a community development corporation (CDC). Interest rates for this loan can range between 3.5% to 5%. If you qualify for this, you’ll also be expected to create one job per $65 000 borrowed.


Traditional Commercial Mortgage Loans

These types of loans are generally harder to qualify for. Most lenders would require a higher personal credit score, usually, 700 going higher, than the government options. They also have stricter requirements concerning annual revenues and years in business. Interest rates and repayment terms would also depend on a variety of factors. If your business is already well-established though, this might be one the best option for you.


Commercial Bridge Loans

This type of loan is suitable for you if you’re only in need of short-term financing solutions. These bridge the gap between a more permanent mortgage and the expiration of a short-term loan and is often used to refinance and get cash out of the property. One thing you should watch out from this kind of loan is that it has higher interest rates and quickly reaches maturity. By then, the loan must be paid in full or extended into a long term loan.


How To Get a Commercial Real Estate Loan

Much like most loans, getting a commercial real estate loan will take time and a lot of patience. You can enjoy a smoother process though if you have everything you need prepared. Here are some tips to guide you.

  • Know Your Credit Score

The general rule when it comes to credit scores is that the higher, the better. Most lenders would take more kindly to business owners who have higher credit scores, at least 600 and above. With a higher credit score, you can also qualify for commercial real estate loans that don’t require down payment.

  • Take Note of Other Real Estate Loan Requirements

Aside from your credit score, lenders will also look at an array of other things to determine your eligibility for the loan. While it often varies per lender, some of the most common factors they’ll be looking at are annual revenues, overall time in business, debt-to-income ratio, and value of collateral assets.


Generally, you’d want to aim for operating your business at least for 2 full years before applying for any major loan. You should also make sure that your gross income exceeds your total debts. This, in combination with your credit scores, will increase your chances of being granted a loan.


Takeaway

Once your business starts growing, it’s best to start saving up for a commercial real estate down payment. This ensures that everything will go a lot more smoothly once you decide to take the plunge. Make sure that you’re also confident that the interest rate of the loan won’t upset your debt-to-income ratio and trap you in a neverending cycle of debt. As with any loan, it’s also best for you to do your research and look around for the best terms that will meet your needs. And don’t forget, no matter how good the terms, nothing can pull you out of one bad location so choose wisely.


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