You may seek a commercial real estate loan when expanding or renovating your business. Unlike other business loans or residential mortgages, commercial real estate loans are used to purchase or renovate commercial properties. Business entities buy 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, the property must be 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 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 funded and lending institutions used. There are some major differences between home loans and commercial mortgages. For instance, commercial real estate mortgages have a higher interest rate and a lower loan-to-value ratio than residential mortgages. 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, and SBA 504 Loan.
How to Get a Commercial Real Estate Loan?
Like home loans, private lenders, banks, credit unions, and government-backed lending institutions offer CRE loans. 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 for a commercial mortgage requires a lot of documentation. The lender will evaluate for 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. Securing a CRE loan can become even more complicated if you have a poor credit score. It’s best to work with a commercial mortgage broker to find various available loan options and ensure the best deal.
