Commercial Real Estate Financing

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What is a Commercial Real Estate Loan?

Commercial Real Estate Loan

Commercial Real Estate Loan with Hub City Lending

A commercial real estate loan, as opposed to a residential real estate loan, is a mortgage secured by a lien on business property. Commercial real estate (CRE) is any income-producing real estate utilized for commercial purposes, such as offices, shops, hotels, and apartments.

Small businesses who want to buy, expand, or refurbish their locations may apply for a CRE loan. Corporations, developers, partnerships, funds, trusts, and real estate investment trusts, or REITs, are the most common recipients of CRE loans.

To put it another way, commercial real estate entities founded specifically for the aim of owning and operating commercial real estate. The company entity buys commercial property, leases out space, and then collects rent from the tenants. Commercial real estate loans are used to fund the enterprise, which includes the acquisition, development, and construction of these properties.

Banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the US Small Business Administration’s 504 Loan Program, are all engaged in providing CRE loans, just as they are with residential property. Commercial lenders, like residential lenders, take varying amounts of risk and have varying terms to give to borrowers.

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Types of Commercial Real Estate (CRE) Loans

Here are the most common types of CRE loans:

Permanent Loans are first mortgages on a commercial property. A permanent loan must have some amortization and a term of at least five years written into the contract. 

SBA Loans are written by traditional and non-traditional lenders but are guaranteed by the SBA. 

There are several different SBA loans that cater to different types of borrowers, the most popular being the 7(a) loan. 

Bridge Loans provide a short-term first mortgage loan on a commercial property typically with a six-month to a three-year term. Bridge loans are typically obtained when a borrower is waiting for longer-term financing or attempting to refinance an existing obligation.

Commercial Real Estate Loan Interest Rates and Fees

Commercial real estate loans are typically more expensive than residential loans. Typical down payments range from 20% to 30% of the total buying price. Interest rates are also generally higher, ranging from 10% to 20% for most borrowers. As of January 2019, loans backed by the Small Business Administration (SBA) (see below), which are among the most affordable, ranged from 7.75 percent to 10.25 percent, depending on the size and length of the loan.

Repayment Schedules for Commercial Loans

Monthly payment: This is the amount you’ll pay each month in a set amount. It consists of the principal, interest, and fees.

Total payments: This is the total of all loan payments due, which includes the principal amount borrowed plus interest and fees.

Total interest paid: The total interest paid is the amount charged by the lender for the loan. You may be able to save money on interest if you repay the loan early.

APR: This figure shows the loan’s true yearly cost, making it easier to compare goods on an apples-to-apples basis. Some lenders do not provide an annual percentage rate (APR) and instead provide a generic interest rate that does not include any costs. The annual percentage rate (APR) for business loans is determined by your credit score as well as the financials of your company, including annual revenue and time in operation.

Calculator Commercial Real Estate Loan

The monthly payments and total interest costs of a small-business loan can be calculated using a Commercial Loan calculator. To use a calculator, you will need to have the following information:

  • Loan amount.
  • Loan term.
  • Estimated annual percentage rate.

Commercial Real Estate Loan calculators also use your credit score, to provide your business financing choices.

Commercial Real Estate Loan Requirements

What do lenders look for?

Before awarding a commercial loan to your small business, lenders often have three sets of requirements. These requirements are most likely related to the finances of your company, your personal finances, and the qualities of the property.

Business Finances

Commercial real estate loans are typically scrutinized closely since small enterprises are seen as risky, and many fail. Banks and commercial lenders will examine your books to ensure that your company has enough cash flow to repay the loan.

Your company’s debt service coverage ratio, which is defined as your annual net operating income (NOI) divided by your annual total debt service (the amount you’ll have to pay back principal and interest on your loan), is likely to be calculated by a lender. A usual requirement is a ratio of 1.25 or higher. If your company is debt-free and you apply for a $100,000 commercial real estate loan, the lender will expect you to earn a net operating income of at least $125,000.

Business Credit

The lender will also look at your company’s credit score to determine your eligibility for a commercial loan and the terms that would apply (interest rate, payback time, and down payment requirement). The SBA 7(a) loan, the government agency’s flagship loan program, requires a minimum FICO Small Business Scoring Service (SBSS) credit score of 155, while there are lots of exceptions that allow small firms to acquire a loan with a score lower than that.

A business entity, such as a limited liability company or a S corporation, should be formed for your small firm. If you default on a real estate loan to a sole proprietorship, it will be regarded personal rather than commercial, putting your personal fortune at danger.

Personal Finances

Small businesses are typically run by an owner or a few partners. Banks and commercial lenders will look at your personal credit score and history to discover if you’ve had any previous financial issues, such as defaults, foreclosures, tax liens, court judgements, and so on. A bad personal credit score can hurt your business’s chances of getting a commercial loan.

Property Characteristics

The collateral for the loan is the property being financed, and the lender adds a lien to the property that authorizes seizure if you don’t repay on time. Your small firm will typically need to occupy at least 51 percent of the building to qualify for a commercial real estate loan. Otherwise, you should apply for an investment property loan, which is designed specifically for rental houses.

Hard-money Loans

Hard-money lenders often provide loans based only on the value of the property, with little regard for the borrower’s creditworthiness. Commercial buildings, storefronts, and facilities such as a warehouse or lab are all eligible. Single-family homes won’t qualify, but a multi-family property can if you use it for your business and it takes up at least 51 percent of the space.

A loan-to-value ratio (LTV) of 65 percent to 80 percent is typical for commercial real estate loans. For example, if the property is valued at $200,000 and the lender demands a 70% LTV, you’ll be required to put down $60,000 in order to secure a $140,000 loan.

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