A Guide to Terms for Commercial Real Estate Loans

Navigating the world of commercial real estate loans can be complex, but understanding the key terms can make all the difference.

The loan-to-value (LTV) ratio is a crucial metric, typically ranging from 50% to 80%, depending on the lender and the property's value. This ratio determines how much of the property's value the lender is willing to finance.

Commercial real estate loans often come with a fixed interest rate, which can range from 4% to 12% per annum, depending on the loan terms and market conditions.

The loan term, also known as the amortization period, can vary significantly, typically ranging from 5 to 25 years.

Commercial real estate loans offer a range of options for borrowers. Most commercial loan options provide the full loan amount upfront.

With a commercial construction loan, borrowers receive the loan amount in increments known as a draw schedule. This allows them to receive funds from the lender as they pass specific milestones in their construction process.

Borrowers can use construction loan proceeds to buy the land or secure the loan after the land has been purchased. The latter is more common as a construction loan can take time to qualify for.

On a construction loan, borrowers only pay interest on the loan proceeds they have received. For example, if they're approved for a $750,000 construction loan but have only received $200,000, they're only paying interest on the $200,000.

The loan is tied to a draw schedule, which means the lender is often very involved in the construction process. Routine inspections are required to ensure the project is hitting each milestone.

A conventional commercial loan is a type of loan used to finance the acquisition, refinance, or renovation of a commercial property. It's similar to a traditional home loan, but with shorter terms.

Lenders typically require a 25% down payment, which can be a significant upfront cost. This is in exchange for a fixed-rate mortgage ranging from 5 to 30 years. Commercial mortgages often have shorter terms, usually between 5 to 10 years.

Interest rates for conventional commercial loans can vary, but typically fall between 5% to 8%. This can be higher than other loan options. Loan terms can range from 5 to 25 years, with fixed or adjustable payment schedules.

To qualify for a conventional commercial loan, you'll typically need a minimum credit score of 680. However, some lenders may require a score of 700 or higher. Business age is also a factor, with most lenders requiring at least two years of operation.

Here are the key requirements for a conventional commercial loan:

These requirements can be more stringent than other loan options, but conventional commercial loans can provide access to low-cost capital for investors with good credit.

Small Business Administration (SBA) loans are government-backed, making them a safe choice for commercial lenders and offering lower interest rates for borrowers.

SBA loans are excellent choices for commercial real estate purchases due to their low-interest rates, lengthy amortization periods, and availability. However, note that regular real estate investors don't qualify for SBA loans.

To qualify for an SBA loan, you must be a for-profit business with a cash flow, have equity invested from you, the owner, and a demonstrable need for financing. You must also not have any outstanding debt to the US government.

Here are some key terms for SBA loans:

SBA 7(a) loans have a minimum credit score of 680, a minimum business age of 2 years, and a debt service coverage ratio (DSCR) of 1.25x. SBA 504 loans have a minimum credit score of 680, a minimum business age of 2 years, and a DSCR of 1.20x.

The SBA 7(a) loan is a popular option for small business owners looking to purchase or refinance commercial real estate. This loan type is backed by the Small Business Administration (SBA) and offers low interest rates, a maximum loan-to-value of 90%, and a loan term of up to 25 years.

To qualify for an SBA 7(a) loan, you'll need to meet certain eligibility requirements, including having a credit score of at least 680 and being in business for at least three years. You'll also need to put down at least 10% of the purchase price.

One of the benefits of SBA 7(a) loans is their flexibility in terms of loan proceeds. You can use the loan to finance the purchase, construction, or renovation of a commercial property. The loan amount is capped at $5 million, and you can expect to pay interest rates ranging from 5% to 8.75%.

Here are the key terms of an SBA 7(a) loan at a glance:

Overall, the SBA 7(a) loan is a solid choice for small business owners looking to finance their commercial real estate needs.

The 504 Plan is a type of SBA loan that has no maximum loan amount. This is in contrast to other SBA loans that have specific limits.

These loans can be used for a wide range of business purposes, including purchasing commercial real estate. The SBA 504 loan can cover up to 90% of the purchase price of commercial real estate, regardless of the size of the deal.

The 504 Program is a great option for small business owners looking to purchase or renovate commercial real estate. It's a long-term, fixed-rate financing option that can help you grow your business.

SBA 504 loans can be used to finance up to 90% of the purchase price of commercial real estate, regardless of the size of the deal. This means you'll need to put down a significant amount of money, but it's a worthwhile investment for your business.

The loan terms for SBA 504 loans are typically 20 years for commercial real estate purchases, and 10 years for equipment purchases. Interest rates are usually between 3.5% and 5%, which is a relatively low rate compared to other financing options.

Here are the key details of the SBA 504 loan program:

To qualify for an SBA 504 loan, your business must operate as a for-profit company in the US and have a tangible net worth value no greater than $15 million. Your net income must also not exceed $5 million (after federal income taxes) for the previous two years before applying.

Mezzanine financing is a type of debt financing that bridges the gap between a commercial real estate loan and the borrower's equity.

Mezzanine financing typically involves a junior loan that is secured by the same collateral as the senior loan, such as a first mortgage.

The mezzanine loan is usually unsecured or undercollateralized, making it riskier for lenders. This is because the senior loan has priority in the event of default or foreclosure.

A key characteristic of mezzanine financing is that it often involves a higher interest rate and fees compared to traditional senior loans. This is because lenders are taking on more risk by providing a junior loan.

Mezzanine financing can be used to provide additional capital to a borrower who is unable to secure a traditional senior loan, often due to a high loan-to-value ratio.

Financing Options are crucial for securing a commercial real estate loan.

You can pursue 10 types of real estate loans that are widely considered to be the best choices for purchasing long-term real estate investments, short-term business ventures, and everything in between.

To qualify for these financing options, your business must meet certain requirements.

You have to have a business that meets certain requirements, such as having a good credit score, a solid business plan, and a sufficient down payment.

These requirements will vary depending on the type of financing option you choose.

Multifamily properties with 5 or more units are considered commercial properties, often referred to as apartment or condo buildings. They usually require financing with higher loan limits, ranging upwards of $5 million.

A commercial loan for a 5+ unit multifamily property can be offered by both traditional banks and private lenders. Traditional banks may also want the borrower to have an excellent credit score and sold personal financials.

Multifamily properties are considered commercial properties when they have 5 or more units, requiring financing with higher loan limits, often upwards of $5 million.

These properties typically need to demonstrate sufficient cash flow to qualify for a commercial loan, which can be offered by both traditional banks and private lenders.

A traditional bank may also want the borrower to have an excellent credit score, solid personal financials, and an established relationship with the bank.

The multifamily market has become extremely popular, making it easier to find real estate and mortgage brokers specializing in this asset class.

Land is a limited resource and can have a high return on investment since it is often cheaper than buying a completed asset.

Securing a commercial vacant land loan can be achieved through a private lender that specializes in land loans. These loans are often short-term, ranging from 12-24 months.

A larger down payment is usually required, typically 45-50% of the purchase price. This is because land deals are more risky for lenders.

This type of loan is ideal for an investor who wants to purchase land and sell it to a developer, or an investor who wants to build on it themselves once they secure a construction loan.

It's not a good option for land bankers, or investors who want to hold onto the land for a long period of time and wait for it to appreciate in value.

Loan terms for commercial real estate loans can vary, but most typically range from five to 25 years. This is a significant difference from residential loans, which often have terms ranging from 15 to 30 years.

A lender might make a commercial loan for a term of seven years with an amortization period of 30 years, for example. In this situation, the investor would make payments for seven years based on the loan being paid off over 30 years, followed by one final "balloon" payment of the entire remaining balance on the loan.

The length of the loan term and the amortization period affect the rate the lender charges, with longer loan repayment schedules typically resulting in higher interest rates.

Interest rates on commercial loans are generally higher than on residential loans.

Commercial real estate loans often involve additional fees that add to the overall cost of the loan, including appraisal, legal, loan application, loan origination, and/or survey fees.

A one-time loan origination fee of 1% is not uncommon, due at the time of closing, and an annual fee of one-quarter of one percent (0.25%) is also common.

For example, a $1 million loan might require a 1% loan origination fee equal to $10,000 to be paid upfront, with a 0.25% fee of $2,500 paid annually (in addition to interest).

These fees can add up quickly, making it essential to factor them into your loan calculations.

Repayment schedules are a crucial aspect of loan terms, and understanding them can help you make informed decisions about your borrowing options.

A residential mortgage typically has a 30-year fixed-rate loan term, but you can also opt for 25-year or 15-year mortgages. The longer the amortization period, the smaller the monthly payments, but you'll end up paying more in interest over the life of the loan.

Most residential loans are amortized over the life of the loan, ensuring you'll be fully paid off by the end of the loan term. For example, a $200,000 home with a 30-year fixed-rate mortgage at 3% would require 360 monthly payments of $1,027.

Unlike residential loans, commercial loans often have shorter loan terms, ranging from five years to 20 years. The amortization period, however, can be longer, sometimes up to 30 years. This means you'll make payments based on a longer loan term, followed by a final balloon payment to pay off the remaining balance.

Commercial loans from traditional banks typically have a similar repayment schedule to residential loans, ranging from 15-20 years. However, some banks may offer terms as short as five years. To qualify for a commercial loan from a traditional bank, you'll need to have a strong credit profile and a significant down payment, usually at least 20%.

Loan terms can be complex, but understanding them is crucial when it comes to securing a commercial or residential loan. Lenders calculate the loan-to-value ratio (LTV) by dividing the loan amount by the property's appraised value or purchase price.

For both commercial and residential loans, a lower LTV means you'll qualify for more favorable financing rates. This is because you have more equity in the property, which equals less risk for the lender.

High LTVs are allowed for certain residential mortgages, such as VA and USDA loans (up to 100% LTV), FHA loans (up to 96.5% LTV), and conventional loans (up to 95% LTV).

Commercial loan LTVs typically range from 65% to 85%. The specific LTV often depends on the loan category, such as raw land or multifamily construction.

Here's a breakdown of the LTV ranges for different types of commercial loans:

Commercial lenders also consider the debt-service coverage ratio (DSCR), which compares a property's annual net operating income (NOI) to its annual mortgage debt service. A DSCR of at least 1.25 is generally required to ensure adequate cash flow.

A lower DSCR may be acceptable for loans with shorter amortization periods and/or properties with stable cash flows. For example, a DSCR of 0.92 means there's only enough NOI to cover 92% of annual debt service.

Conventional mortgage terms can vary, but typically range from 5 to 25 years. This is often shorter than residential mortgage terms, which can last up to 30 years.

A conventional commercial loan requires a significant down payment, usually at least 20% of the property's value. This is because lenders view commercial property as a riskier investment than residential property.

The interest rate on a conventional commercial mortgage can range from 5% to 8%, which is generally higher than residential mortgage rates. Some lenders may offer more favorable rates to borrowers with excellent credit and a strong business history.

Lenders typically require a minimum credit score of 680 to qualify for a conventional commercial mortgage. However, some lenders may require a higher score, such as 700.

Here are some key characteristics of conventional commercial mortgage loans:

Commercial property owners should plan to make regular mortgage payments for the life of the loan. This can help them build equity in the property and achieve their financial goals.

Conduit Mortgages offer lower fixed interest rates compared to traditional commercial real estate loans. This is because the loans are pooled with other similar commercial loans and sold on secondary stock markets to institutional investors, minimizing risk.

The risk is minimized because all the loans in a CMBS pool serve as collateral for each other. This setup makes conduit loans accessible for many entrepreneurs or business owners who may not have qualified for traditional commercial real estate loans.

One of the benefits of conduit loans is that they usually offer prepayment in the form of defeasance. This means you don't have any minimum prepayment requirement, giving you more flexibility with your loan.

Prepayment terms can be negotiated along with other loan terms in commercial real estate loans, including conduit loans. The specific terms will be identified in the loan documents, so be sure to review them carefully before signing.

Here are the four primary types of "exit" penalties for paying off a loan early, which may be applicable to conduit loans:

Commercial loans are a type of financing that allows businesses to borrow money for commercial real estate purchases or construction projects.

Most commercial loan options provide the full loan amount upfront, but commercial construction loans give the borrower the loan amount in increments known as a draw schedule, tied to specific milestones in the construction process.

A borrower can use construction loan proceeds to buy the land or secure the loan after purchasing the land, as the latter is more common due to the time it takes to qualify for a construction loan.

The lender is often very involved in the construction process, requiring routine inspections to ensure the project is hitting each milestone.

Commercial construction loans allow the borrower to only pay interest on the loan proceeds they have received, not the total loan amount.

For example, if a borrower is approved for a $750,000 construction loan but has only received $200,000, they are only paying interest on the $200,000.

Commercial real estate loan types include SBA 7(a), SBA 504, Conventional Commercial Mortgage Loan, Commercial Bridge Loan, and Commercial Hard Money Loan.

Here are the key characteristics of each loan type:

Commercial real estate loans are generally made to investors such as corporations or organizations that own and operate commercial real estate.

Lenders consider the nature of the collateral, the creditworthiness of the borrower, and financial ratios when evaluating commercial real estate loans.

CRE loans tend to be more expensive than residential loans.

When evaluating commercial real estate loans, lenders consider the loan's collateral, the creditworthiness of the entity, and financial ratios, such as the loan-to-value ratio and the debt-service coverage ratio.

The typical term of a commercial loan can vary, but it's generally shorter than a residential loan. Most commercial loans have a term ranging from five to 25 years.

For example, some commercial loans from traditional banks can have terms as short as five years, while others can go up to 25 years. However, it's worth noting that the amortization period is often longer than the term of the loan.

Here's a breakdown of the typical term of a commercial loan:

In general, the longer the loan term, the higher the interest rate the lender will charge. However, having a longer term can also provide more flexibility for businesses with fluctuating cash flows.

Commercial loans can be a great option for businesses that need to finance a commercial property or equipment. However, it's essential to carefully review the loan terms and conditions to ensure they meet your business needs.

Commercial real estate loans can be either fixed-rate or variable-rate, giving you a choice when receiving your approval letter. You can discuss these options with your lender to determine the best structure for your loan agreement.

Fixed-rate loans are often preferred for their stability and predictability. With a fixed-rate loan, you can expect a fixed interest rate for the entire term of the loan, typically ranging from 5 to 30 years. This can provide peace of mind and help you budget for your loan payments.

Variable-rate loans, on the other hand, can offer lower interest rates initially, but the rate may change over time. This can be a risk, as rising interest rates can increase your loan payments. However, some borrowers may prefer the flexibility of a variable-rate loan.

Here's a comparison of fixed-rate and variable-rate loans:

Ultimately, the choice between a fixed-rate and variable-rate loan depends on your individual financial situation and goals. Be sure to discuss your options with your lender to determine the best fit for you.