Investing in commercial real estate requires significant capital. If you purchase a retail space, office building, or multi-family unit, securing financing is a major step. Commercial real estate loans are often the best option for investors who need to fund their property acquisitions or developments.
Knowing the different commercial real estate loan types is key to selecting the right one for your investment goals. Each type of loan comes with unique terms, qualifications, and conditions. Knowing which one fits your project’s requirements can make a big difference.
Hard Money Loan
A hard money loan is a short-term, asset-based loan primarily used for real estate transactions. These loans come from private lenders or groups of investors rather than traditional banks. They are secured by the value of the real estate being financed.
Real estate investors typically use hard money loans to quickly purchase and renovate properties for a profit. These loans are popular for fix-and-flip projects, where investors need quick access to capital. They allow investors to purchase distressed properties, make improvements, and sell them at a higher price.
The most notable feature of hard money loans is their speed. These loans are typically approved and funded much faster than traditional loans, sometimes within a matter of days. Hard money lenders focus on the value of the property rather than the borrower’s creditworthiness. This focus streamlines the approval process and allows it to be completed more quickly.
However, hard money loans come with higher interest rates and fees, ranging from 8% to 15%. This is due to the higher risk associated with the loan. Hard money lenders are more concerned with the property’s potential value than the borrower’s financial history.
The term of a hard money loan is usually short, ranging from six months to two years–ideal for quick-turnaround projects like property flips. The loan-to-value (LTV) ratio for hard money loans is typically lower than conventional loans, often around 60% to 75%.
Conventional Commercial Real Estate Loan
A conventional commercial real estate loan is one of the most common financing options for commercial properties. These loans are provided by banks, credit unions, and other traditional lenders. They are typically used as long-term financing options for purchasing or refinancing commercial properties.
The most significant characteristic of conventional loans is their low interest rates compared to other types of commercial loans. Interest rates can start as low as 3% for qualified borrowers. Therefore, these loans are an attractive option for stable and well-established investors.
However, these loans are not easy to obtain. Lenders require a substantial down payment, often ranging between 20% to 30% of the property’s value. Additionally, the borrower must meet strict qualifications, including a strong credit history, a stable income, and a well-documented business plan. The loan term can range from five to thirty years. Payments are typically amortized over a 20 to 25-year period.
One of the primary benefits of a conventional commercial real estate loan is its relatively low cost of capital. However, securing this loan type can be time-consuming and cumbersome. Banks and lenders will thoroughly vet the borrower’s creditworthiness and financial history.
In some cases, borrowers may need to provide additional documentation, such as tax returns, financial statements, and business plans to demonstrate their ability to repay the loan.
Commercial Bridge Loan
A commercial bridge loan is a short-term financing solution designed to help investors bridge the gap between the purchase of a property and its future financing. This loan is typically used when an investor wants to secure a new commercial property but needs more time to arrange long-term financing.
A bridge loan is most commonly used for time-sensitive transactions. It helps investors purchase a property while waiting for another to sell or while securing permanent financing.
The term for a commercial bridge loan is relatively short, usually six months to three years. It offers quick access to capital and allow investors to make purchases before permanent financing is available. Due to its short-term nature, a bridge loan generally offers higher interest rates than conventional loans. The rates can range from 6% to 12%–depending on the lender and the borrower’s financial profile.
The approval process for a bridge loan is also faster than a traditional loan. This makes it ideal for investors who need quick funding. However, bridge loans are often used to acquire distressed or underperforming properties. Lenders focus more on the property’s value as collateral rather than the borrower’s credit score.
This makes bridge loans accessible to investors who may have less-than-perfect credit but have an opportunity to purchase valuable real estate. While the higher interest rates and fees can be a drawback, the flexibility and speed of bridge loans make them a good choice for certain real estate projects.
SBA 7(a) Loan
The SBA 7(a) loan is a popular financing option for small business owners looking to purchase or renovate commercial real estate.
Offered through lenders who partner with the U.S. Small Business Administration (SBA), the SBA 7(a) loan provides long-term financing. Borrowers benefit from competitive interest rates, making it an attractive option. This loan can be used for various purposes, including purchasing a commercial property or refinancing existing debt. It can also fund improvements to an existing building.
One of the key advantages of an SBA 7(a) loan is the relatively low down payment requirement, which can be as low as 10%. This makes it an appealing option for smaller investors who may not have access to the significant capital required by conventional loans.
The loan term for SBA 7(a) loans typically ranges from 10 to 25 years, with the option of fixed or variable interest rates. The SBA 7(a) loan allows for higher borrowing limits compared to traditional commercial loans. The maximum loan amount can go up to $5 million.
However, SBA 7(a) loans come with certain qualifications that borrowers must meet. For example, the borrower must operate a business in the U.S. and have a sound financial history. Additionally, the SBA requires that the borrower exhaust other financing options, such as personal loans or traditional commercial loans, before turning to an SBA 7(a) loan.
The approval process for SBA loans can also be lengthy, sometimes taking several weeks to months to complete. Despite these challenges, the SBA 7(a) loan offers affordable financing with terms that can be favorable to small business owners seeking to purchase or renovate commercial real estate.
SBA 504 Loan
The SBA 504 loan is another financing option provided through the Small Business Administration (SBA), but it differs from the SBA 7(a) loan in several key ways.
The SBA 504 loan is specifically designed for purchasing or improving fixed assets, such as commercial real estate. It is ideal for small businesses that need to buy or renovate properties. However, it can also be used for land acquisition or building new construction projects.
The SBA 504 loan consists of two components. The first is a Certified Development Company (CDC) loan, which can cover up to 40% of the total cost. The second is a bank loan, which can cover up to 50% of the total cost. The borrower must contribute the remaining 10% to 20% as a down payment. This depends on the nature of the property and the borrower’s qualifications.
One of the key benefits of the SBA 504 loan is its favorable interest rates–typically lower than those offered by conventional loans or bridge loans. The loan term can range from 10 to 25 years, with longer terms available for construction projects.
While the SBA 504 loan offers significant benefits for property owners, it comes with certain restrictions. For example, the loan can only be used for specific types of property, such as office buildings, manufacturing facilities, or medical centers. The borrower must also meet certain eligibility criteria, including having a strong business history and a sound financial track record.
The approval process can take several months, as the SBA requires thorough documentation and vetting before granting approval. Despite these challenges, the SBA 504 loan is an attractive option for small businesses looking for affordable long-term financing to purchase or improve commercial real estate.
CMBS or Conduit Loan
A CMBS (Commercial Mortgage-Backed Security) loan, also known as a conduit loan, is a unique type of commercial real estate loan. Unlike traditional loans that are issued by banks or credit unions, CMBS loans are pooled with other loans and then sold as securities to investors on the secondary market.
This makes CMBS loans a popular choice for larger commercial properties such as office buildings, shopping centers, and hotels. Lenders can diversify the risk and attract investors by pooling a large number of loans. This approach makes it easier to secure financing for larger-scale commercial properties.
CMBS loans typically have longer loan terms, ranging from five to ten years, and the payments are amortized over 30 years. These loans often come with fixed interest rates. This provides borrowers with predictable monthly payments throughout the loan term.
The interest rates for CMBS loans can be more competitive compared to other commercial loans, as the risk is spread across multiple loans in the security pool. However, the approval process for a CMBS loan is typically more stringent. Lenders require a high credit score, a solid debt service coverage ratio, and a strong track record of managing commercial real estate investments.
One of the main advantages of a CMBS loan is the ability to secure larger loan amounts, as they are typically intended for larger properties. The loan-to-value (LTV) ratio for a CMBS loan typically ranges from 65% to 80%, depending on the property and borrower qualifications.
While CMBS loans offer favorable rates and longer terms, the process can be more complex, and the loans may come with prepayment penalties. It’s important for borrowers to carefully consider their exit strategies.
USDA CRE Loan
A USDA Commercial Real Estate (CRE) loan is a specialized loan designed to support developing and improving commercial properties in rural areas.
These loans are offered by approved lenders in partnership with the U.S. Department of Agriculture (USDA). They are primarily aimed at encouraging economic development in less populated regions. USDA CRE loans can be used for a wide range of commercial real estate projects, including agricultural buildings, retail centers, warehouses, and even multi-family residential properties in rural areas.
One of the major advantages of a USDA CRE loan is the ability to secure financing with a relatively low down payment. In some cases, the down payment requirement can be as low as 10%. This makes it an attractive option for small business owners or real estate developers looking to invest in rural communities.
The loan terms for USDA CRE loans can range from 10 to 30 years. Interest rates are typically competitive, especially for borrowers with good credit and strong financials.
To qualify for a USDA CRE loan, the property must be located in an eligible rural area as defined by the USDA. Borrowers must also meet certain eligibility criteria, including the size of the business and the type of property being financed. USDA CRE loans are typically offered for owner-occupied commercial properties. This means that the borrower must intend to operate their business from the property.
These loans are particularly beneficial for agricultural-based businesses or developers looking to expand into rural areas. They offer affordable financing options with long repayment terms.
Unlock Your Real Estate Potential!
Coastal Capital Lending offers a variety of commercial real estate loan types to help investors achieve their property goals. Whether you need funding for a commercial property purchase, renovation, or bridge financing, we provide fast, flexible solutions tailored to your needs.
With our focus on property value and streamlined approval process, we make it easier for you to access the capital you need for your real estate investments. Borrow with us and let us help you turn your vision into a successful project with the right financing.
