Commercial Real Estate Loans 101: Types and Options

Commercial real estate loans can be a complex and intimidating topic, but don't worry, we've got you covered. There are several types of commercial real estate loans to choose from, each with its own unique characteristics and benefits.

A conventional loan is a popular option for commercial real estate financing, with terms ranging from 5 to 20 years. This type of loan typically offers a fixed interest rate and a low down payment requirement.

For smaller commercial properties or short-term financing needs, a hard money loan may be a better fit. These loans are typically short-term, with terms ranging from 6 months to 3 years, and offer a higher interest rate in exchange for a faster approval process.

Whether you're a seasoned investor or a first-time buyer, understanding your loan options is key to making an informed decision and securing the right financing for your commercial real estate venture.

Commercial real estate loans can be complex, but understanding the different types can make all the difference. There are several types of commercial loans, including commercial real estate loans, commercial auto loans, and commercial construction loans.

Commercial real estate loans typically require at least 20% down and may have unusual loan structures, such as balloon payments or shorter term lengths. Commercial construction loans offer funds available on a draw schedule to pay for construction costs, including land.

Here are some common types of commercial loans:

It's worth noting that SBA loans, such as SBA 504 loans, can be used for commercial real estate and equipment financing, but have a lengthy application process and long turnaround times.

Traditional banks are a great option for businesses with strong financial profiles and well-established operating histories, offering the most affordable interest rates. However, they can impose strict qualifying criteria and have longer funding times than online lenders.

Smaller banks tend to utilize more local decision-making, making larger loans based on their understanding of the local market and the borrower's track record of execution in that region. These lenders may be willing to be extra aggressive in their pricing and terms for the "right" deals.

Local banks usually have a smaller overall balance sheet, so loan sizes may be capped, but for the right deals, they may be willing to offer more flexible terms. As deal sizes increase, most borrowers will explore conventional financing through larger, national banks.

Traditional banks are considered "relationship lenders", meaning they want to know the borrower and the team behind the deal being financed. They expect the sponsor to have "skin in the game", which translates into upwards of 30-40% equity in a deal.

These lenders are usually willing to work with the borrower time and time again, assuming the borrower remains in good standing with the bank. However, they are heavily regulated, so borrowers should expect to have an active lending partner that monitors each deal closely.

Agency loans are a type of commercial real estate loan initiated by government-sponsored enterprises like Fannie Mae and Freddie Mac.

These loans are specifically designed for multifamily properties that are already stabilized, limiting their broad applicability.

Agency loans tend to offer the most competitive rates and terms among CRE financing options, making them a great choice for borrowers who qualify.

They are typically structured as non-recourse loans, meaning the borrower is not personally liable for the loan, and are available at long-term, low-cost fixed rates.

Many agency loans include an attractive interest-only period, providing borrowers with a temporary reduction in payments.

However, agency loans come with a cost: flexibility. Borrowers may face penalties for modifying their loan or prepaying the loan.

To obtain an agency loan, borrowers need to contact a loan originator approved to underwrite loans to agency guidelines, such as Walker & Dunlop, Berkadia, or CBRE.

CMBS loans are a type of commercial real estate loan that are issued through a conduit, usually a large national bank, who will make various commercial real estate loans and then package them up to sell off to the public as bonds.

These loans can be used for any property type, but are most commonly used for multifamily, industrial, office, and grocery-anchored retail properties.

CMBS loans favor income-generating properties and provide commercial real estate loan terms ideal for long-term investments.

They deliver stability, but may limit flexibility on prepayments, fitting properties with predictable revenue streams.

CMBS loans are generally considered a fallback option for borrowers who do not obtain financing through a traditional lender, agency lender, or life insurance company.

The underwriting criteria for CMBS loans is less rigorous than these other alternatives, making them a viable option for borrowers who have less experience or a less-than-ideal track record.

CMBS loans can be utilized for properties with existing, stable cash flows, and are often utilized in secondary and tertiary markets.

A blanket loan is a loan that finances multiple properties at the same time. It's also known as a "portfolio" loan.

This type of loan is attractive for investors who want to refinance a large portfolio of properties. It helps them avoid variable loan-to-value ratios that would occur if each property were financed individually.

A key feature of a blanket loan is that the loan survives the sale of one or more of the commercial properties it's secured by. This means the borrower only needs to "retire" the portion of the mortgage that the sold property represents, without having to refinance the entire loan.

A borrower with a portfolio of properties can use a blanket loan to acquire a new asset with less equity than would otherwise be required by a traditional lender. This is because the loan-to-value ratio of the entire portfolio remains within the lender's standards, even if individual properties don't meet those criteria.

Managing multiple properties can be a hassle, but a blanket loan simplifies the financing process. The borrower only needs to oversee and manage one larger loan, rather than several individual mortgages.

Bridge loans are a type of commercial real estate loan that provides short-term capital to borrowers who need to act quickly, such as when purchasing distressed property. They're meant for businesses with a specific time frame in mind.

Bridge loans are structured to be short-term, usually three years or less, sometimes with two one-year options to renew. They're designed to provide a "bridge" from one source of financing to another.

These loans tend to have higher interest rates than traditional commercial real estate loans, with rates 50 to 200 basis points higher than a conventional bank loan. The rate depends on the nature of the deal.

Bridge loans are ideal for temporary cash flow needs and are often used by experienced borrowers who can handle high interest rates. They're also used by investors exploring no money down options for large business loans.

Here are some key characteristics of bridge loans:

Bridge loans offer fast funding, but they're not a long-term solution for businesses. They're meant to fill gaps until securing a permanent loan, and borrowers should plan to refinance or sell the property to pay off the loan.

Mezzanine loans provide businesses with flexible funding for profitable projects in urban markets, allowing them to maintain control over their assets.

Mezzanine loans blend debt and equity financing, offering additional capital without full ownership transfer. With higher interest but no collateral, this option suits high-value investments where owners want extra funding without diluting ownership.

Mezzanine loans work well in urban markets, providing businesses with flexible funding for profitable projects while maintaining control over their assets.

Commercial loans can be structured as term loans, where you receive a lump sum payment to be repaid over time with interest.

There are two types of business term loans: short-term business loans with repayment windows lasting a few months, and long-term business loans spanning several years.

You can also get a business line of credit, which works like a credit card, allowing you to borrow up to a certain limit and only pay interest on the borrowed amount.

Once you pay down your balance, the limit resets and you can borrow against it again.

AVANA Capital's loan builder form can help you navigate the process and submit your information to their team of industry professionals in under 10 minutes.

Their team specializes in helping small businesses understand what they'll receive from each type of loan, including loans with long-term repayment schedules and those that allow construction before principal payments are due.

When selecting a commercial real estate loan, it's essential to balance project risk and potential returns. High-risk loans like hard money require higher interest rates.

Balancing risk and return is crucial for strategic planning, especially for urgent needs. This approach helps you make informed decisions about which loans to choose.

Hard money loans are typically used for short-term financing, often with interest rates between 12% and 18%. SBA loans, on the other hand, offer lower risk and more favorable terms.

Interest rates can be fixed or variable, affecting payment consistency.

Fixed interest rates offer predictable repayment, ideal for companies looking for expansion, as seen in the SBA 504 Loan.

Variable interest rates can be a risk, but they may also offer lower interest rates, making them a better option for companies with a strong financial foundation.

Higher interest rates are often associated with higher-risk loans like hard money, which require more stringent commercial real estate lending guidelines compliance.

Longer loan terms can lower monthly payments but increase total costs, so it's essential to evaluate commercial real estate loan rates to ensure the loan structure aligns with your budget.

A fixed interest rate of up to 25 years is available through the SBA 504 Loan, providing a long-term investment option for businesses.

Commercial real estate loans come in various forms to suit different business needs. Each loan type has its own unique characteristics and benefits.

A traditional commercial mortgage is ideal for established businesses with stable finances and solid credit. These loans offer extended commercial real estate loan terms of up to 20 years, with either fixed or variable interest rates.

Some commercial loans are specifically designed for small businesses. The Small Business Administration (SBA) offers two prominent loan programs: SBA 504 and SBA 7(a) loans. These loans are typically used for real estate improvements, equipment purchases, or machinery financing.

Commercial loans can also be structured as term loans or business lines of credit. Term loans provide a lump sum payment that has to be repaid over time with interest, while business lines of credit allow you to borrow up to a certain limit and pay interest only on the borrowed amount.

Here are some common types of commercial loans:

Bridge loans, in particular, are short-term loans that provide borrowers with short-term capital to purchase and/or improve a commercial property. They are structured to be short-term, usually three years or less, and come with higher interest rates than traditional commercial real estate loans.