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What is a Commercial Real Estate Loan?

A commercial real estate loan is any loan used to purchase commercial real estate. Commercial real estate loans are usually secured, meaning the property will have a lien on it throughout the life of the loan. This entitles the lender to the value of the property in case of a default. Commercial real estate loans can be given by both banks and private lenders. The Small Business Administration(SBA) also has some commercial real estate loan programs, such as SBA 504 loans, and SBA business mortgage loans. Commercial real estate loans can be from 5 – 20 years, and for amounts up to tens of millions. They tend to have rates between 3.35% –  6% and to have amortization periods that outlast their payment terms.

Commercial real estate is defined as any property intended specifically for doing business, or any residential property that has more than 4 units (that is, a rental property). This can mean anything from retail stores, restaurants, office buildings, hotels, malls, etc. Sometimes properties are categorized based on their quality. For example, a building may be in a certain class if it happens to be in a prime location and in great shape, while businesses in need of repair would be in another class. Regarding the latter, some loans are better suited for properties that need renovations before they can support a running business, such as hard money loans. Unlike regular commercial real estate loans, hard money loans are more accessible, asset-based loans, ideal for short, preparatory projects, like repairing buildings or developing the land.

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Rates (%)

Interest rates for commercial real estate loans are typically higher than home loans, often between 3.35% – 6%, depending on other details of the loan. Loans may also include fees, such as origination fees, closing fees, and fees for appraisals or surveys. 

Payment terms for commercial real estate loans are between 5 – 20 years. Usually, these loans will have amortization periods that last longer than the payment term, meaning the final payment will be a balloon payment, since before this you’ll be paying at a rate based on a payment term longer than your actual term, so that the final payment has to be larger to “catch up” to the balance.

Credit Requirements

Credit requirements for commercial real estate loans vary depending on the kind of loan, the amount, and other aspects of the business itself. In general, however, you’ll need a strong credit rating (660 or higher) to get approved for one. Lenders will also typically require down payments of 20% – 30%, and that you have cash reserves covering the first six months of payments.

Stated Income Commercial Real Estate Loan

Stated income commercial real estate loans require less documentation. Lenders will still need to investigate your present financial status, but will only be interested in the bare bones of it, that is, only in what is directly relevant to your ability to pay your loan. For example, they will need some statements of your income, but not all the tax documents that regular commercial real estate loans normally require.

Stated income loans are good for borrowers whose tax receipts do not accurately reflect their income. For example, multiple property-owners who collect rents that only slightly exceed the cost of their buildings may appear to have many debts. So they would likely be turned down by many conventional lenders, even if they ultimately end up with considerable income.

Recourse vs Non-Recourse

The difference between a recourse and non-recourse loan is how your debt is collected. For a recourse loan, if your collateral does not cover the full outstanding balance, the lender is able to pursue other assets to pay off the debt, such as by seizing bank accounts or income. For a non-recourse loan, repayment can only be through collateral. In other words, non-recourse loans do not hold borrowers personally liable for repayment.

At first glance, a non-recourse commercial real estate loan may seem like the way to go, since nobody wants to have their personal assets seized by a lender. However, because recourse loans put lenders at less risk, they tend to have more flexible terms. If you want a less rigid repayment structure, for example, you’d likely be more satisfied with a recourse loan.

Loan to Value (LTV) Ratio

Loan-to-value ratio simply means what percentage the loan makes up of the property value. The lower the LTV, the less you use a loan to finance your property, meaning the more your own money is at stake. While the home loan is sometimes given with a 90% LTV, commercial real estate loans are more often between 65% – 80%.  

Documentation Checklist

When applying for a commercial real estate loan, you’ll first need to make sure your personal financial statements are in order, including up-to-date credit reports, previous loan applications, and tax receipts from the past two years.

Beyond this, lenders will also want to see the property, so you’ll need good photos that demonstrate how well it will facilitate your business plan. For most kinds of commercial buildings, you’ll need to provide the previous years’ operating expenses. Other kinds of buildings may require specific documents. Rental properties, for example, require current rent rolls. And for office or retail properties, lenders will want to see lease schedules, detailing the tenants, unit sizes, and basic lease terms, such as rents. And other properties, such as for hospitality business, will require previous years’ profit and loss statements.

How to get a Commercial Real Estate Loan

Getting approved for a commercial real estate loan can be more difficult than for a home loan since lenders will need to assess not only your financial standing but the strength of your business as well. You’ll first of all need to provide a thorough business plan, showing that you’ve got done the research and have a good sense of how to move your business forward.

You’ll also need to show that you’ve got experience. Depending on how large your business is, lenders may require financial documents from the last 3 – 5 years, such as accounting reports or tax statements. With a good business plan, strong credit, and all your financial documents in order, you’ll be in great shape to get approved for your commercial real estate loan.

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