When it comes to expanding or renovating your business, you may seek a commercial real estate loan. Unlike other business loans or residential mortgages, commercial real estate loans are used to purchase or renovate commercial properties. Business entities purchase commercial properties for multiple purposes, such as setting up a new facility — a store, warehouse, etc. or to expand an existing one. As a subset of business loans, these loans are offered specifically for commercial real estate financing – anything from acquisition to construction to renovation. To purchase or renovate a property by financing through a commercial real estate loan is necessary that the property is used solely for business and not residential purposes. Commercial real estate (CRE) is an income-producing property like retail malls, shopping centers, office buildings and complexes, and hotels.
So, when an investor or business entity takes a loan to buy or renovate a property, leases out space, and collects rent from this income-producing property, it’s known as a commercial real estate loan. Taking a commercial real estate mortgage is different from a home loan. The terms and rates of financing commercial real estate depend on factors like what kind of property is being financed and lending institutions used. There are some major differences between home loans and commercial mortgages. For instance, commercial real estate mortgages carry a higher interest rate and have a lower loan-to-value ratio than a residential mortgage. The loan period is usually 20 years or more and down payments typically range from 20% to 30% of the purchase price.
Typically, there are five commercial real estate loans: Traditional Commercial Mortgage, Commercial Bridge Loan, Commercial Hard Money Loan, SBA 7(a) Loan Used for Commercial Real Estate CDC, SBA 504 Loan.
How to Get a Commercial Real Estate Loan?
Similar to home loans, CRE loans are also offered by private lenders, banks, credit unions, and government-backed lending institutions. To secure this type of loan, it’s important that the business physically resides in at least 51% of the building. This means that the property should be owner-occupied in the majority. Also, like other mortgages, these loans are secured by a lien on the property. This means that the bank can foreclose on commercial real estate. The factors considered by the lender for providing this type of loan include- the nature of the collateral, the creditworthiness of the entity, and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio.
The application process of a commercial mortgage requires a lot of documentation. The lender will evaluate you at least five years of tax returns, financial and credit reports, projected cash flows for the life of the loan, business license or state certification, third-party appraisal of the property, proof of citizenship, etc. If you have a poor credit score, securing a CRE loan can become even more complicated. It’s best to work with a commercial mortgage broker to find various available loan options and secure the best deal.