Commercial real estate (CRE) refers to income-producing property that is used solely for business purposes. This includes shopping malls, retail stores, office buildings, hotels, and other business premises.  Commercial loans may also be used to fund the purchase of rental properties. To finance this type of project, you will need a commercial loan for real estate. Aniya Equity LLC, your reliable real estate solutions company, brings you a couple of insightful tips on how to get a commercial loan for real estate.

What Is A Commercial Loan For Real Estate?

By definition, a commercial loan for real estate is a loan that is secured by a lien on commercial property as opposed to conventional residential property. It is similar to a regular home mortgage in many ways, with the major difference being the property in question. While a residential mortgage is used for purchasing residential properties, a commercial loan for real estate is strictly used for income-producing real estate that is used for business purposes. Again, while residential mortgages are mostly given to individuals, commercial real estate loans are taken up by businesses.

A commercial loan for real estate can be used for all aspects of financing commercial property. It can be used for the development and construction of commercial properties, as well as for the direct acquisition of developed commercial property. As mentioned already, these properties are strictly those used for business purposes like office complexes and shopping malls. This sort of loan normally requires a financial track record that only business entities can afford.

Commercial Real Estate Financing Options

While all loans for commercial properties fall under the umbrella of commercial loans for real estate, there are individual financing options you need to know. These are the types of loans in the main category:

Purchase Loan – This type is used for the direct purchase of commercial properties. And come in bulk amount with long repayment terms (up to 20 years).

Construction Loan – This is used for the construction/building of the commercial property. It may be disbursed in large sums but normally have shorter repayment terms (one to three years).

Refinance Loans – This works almost the same way refinancing works with personal loans. It is mostly used to pay up for a construction loan. The business entity will be able to lock in lower rates and stretch the payment over a longer period of time.

Hard Money Loans – These are typically loans from private lenders that come with steep interest rates and shorter terms. It is only ideal for those who are good at flipping properties and are planning to do that with a particular commercial property.

SBA Real Estate Loans – There are commercial real estate loan programs from the U.S. Small Business Administration, including SBA 7(a) and SBA 504 loans. Like most federal government-backed loans, they have low-interest rates.

Depending on the type of loan you need, your option of lenders can be limited. The major commercial loan for real estate lenders include:

  • Banks
  • Commercial lenders
  • SBA
  • Hard-Money lenders
  • Conduit lenders
  • P2P marketplaces (crowdfunding)

How to Get a Commercial Mortgage Loan

Getting a commercial real estate loan to purchase or renovate a commercial property is mostly easier than getting one to construct a new commercial property. Many lenders prefer when the commercial property is owner-occupied. This means it becomes easier when your business occupies at least 51% of the property. Decide on the type of loan you need and the right lender to approach.

You can watch this video to learn how to get loan approval on commercial real estate

What Is Required For Commercial Loan For Real Estate?

For most lenders, there are three major things that matter when it comes to identifying entities that qualify for commercial loans for real estate, including property characteristics, business finances, and personal finances.

Property Characteristics

This is where the occupancy of the property matters the most. When lenders finance a commercial property, they normally attach a lien to it that allows them to legally seize the property if the business fails to pay the Loan. Since the property is going to serve as the collateral, your business is required to occupy at least 51% of the property. Lenders will consider the value of the property and let businesses borrow up to a maximum loan-to-value (LTV) ratio of between 65% and 75%.

Business Finances

Every lender will want to ensure that businesses will be able to repay loans before approving them. As you can expect, lenders are more careful with commercial mortgage loans than home mortgage loans. They will normally scrutinize your business finances to know if it has the cash flow to repay the loan. Most will calculate the company’s debt service coverage ratio, which is the annual net operating income of the company divided by its annual total debt service. A decent ratio of 1.25 and above is typically required. The business’s credit score will also be considered.

Personal Finances

For small businesses that are controlled by their owners and partners. Lenders may want to look at the personal finances of the owners. It is not uncommon for banks and other lenders to check the credit score and financial history of business owners before approving a commercial mortgage loan. If you have had financial problems like defaults, foreclosures, tax liens, or court judgment, your chances of securing a commercial mortgage for your small business will be reduced. You may still find a lender if you look hard but expect the interest rates and terms to be less favorable.

Preparing for Application of a Commercial Loan for Real Estate

Serious documentation is required for this type of loan, and things can be a little slow. While preparing your application, collect up to five years of tax returns, business accounts, projected cash flow for the duration of the loan, credit reports, a third-party appraisal of the property, and more. You should get as many important documents as you deem necessary before approaching lenders. Source other requirements the lender may request as soon as possible.

What Are Commercial Loan Rates And Terms?

Interest rates and terms for commercial mortgage loans vary according to the type of loan you need and the lender you choose. This year, 2020, the average interest rate for these loans is between 3% and 12%. The terms vary even more widely. Depending on the type of loan, the amount, and the lender, you can get from 12 months to 40 years as the loan term.

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