Types of Commercial Real Estate Financing Explained
Owning commercial real estate, which is the opposite of residential real estate, is not only exciting, but it can be very profitable. After all, many millionaires and billionaires have been made through smart commercial real estate investments. However, for most borrowers, getting into commercial real estate requires financing. Here are 17 types of commercial real estate financing offers.
The Small Business Administration or SBA is a federal agency that helps new entrepreneurs and those with small businesses. They offer loans known as SBA loans. These are government loans for small or newer companies that can be used for buying inventory, refinancing debts, buying real estate, etc. The loans are guaranteed for up to 85 percent through an SBA-approved lender using federal money. Business owners who qualify for these loans typically need an appropriate credit score. However, if a business owner qualifies, there’s less risk for the lender because these loaned are backed by the government. These type of loans are generally for owner occupied real estate where the borrower occupies 50% or more of the property but hotel loans also qualify for these SBA programs.
CMBS / Conduit Loans
A Conduit Loan, also known as a CMBS loan, is one of the types commercial real estate financing offers. CMBS stands for Commercial Mortgage Backed Security. The loan is secured by a first mortgage on a commercial property, one that takes precedence over all other mortgages on the property. The loans are offered by commercial banks, investment banks, Conduit lenders, etc. The interest rate on CMBS loans are fixed and are usually amortized over approximately 25-30 years but the typical financing period is 5 to 10 years. A balloon payment, which is a final amount owed by the borrower at the end of a loan term, is typically a part of CMBS loans.
Commercial real estate mortgages are the most popular types of commercial real estate financing. A commercial mortgage is for an income-producing property that includes things like office buildings, hotels, shopping centers, etc. The financing for this kind of real estate is typically achieved through what is known as commercial mortgages. Various lending bodies provide commercial mortgages including banks, insurance companies, private investors, as well as the SBA. Commercial loans are sometimes made to individual borrowers, but more often to corporations, limited partnerships, developers, and more. A commercial mortgage is a serious endeavor that requires careful examination and approaches. Most who enter into commercial mortgages are sure to have legal counsel around to assist.
A bridge loan is can be used in many types of real estate investments. A property owner takes out a bridge loan to buy another property before the one they are currently living in sells. Thus, the meaning of the word “bridge.” They are loans secured by the existing property and help the owner when the existing property hasn’t sold yet. Although there are benefits to this form of loan, such as being able to buy a new home without the typical restrictions, this kind of loan is more expensive than a home equity loan. A commercial bridge loan is the same concept, except instead of residential property, such as a single-family home, you bridge two commercial properties.
When a loan, such as a mortgage, is refinanced, you take out a new loan to pay off the old loan or loans. The u atypically reason for refinancing is to take advantage of lower interest rates. Residential refinance focuses on homes, but commercial refinance focuses on businesses. When a business refinances through commercial refinancing, the process helps business owners improve their cash flow and bottom line. As with residential property, a lower interest rate can be achieved, and lower monthly payments can be achieved. To take advantage of commercial refinance, commercial investors must stay on top of interest rates and economic conditions.
Commercial Construction Loan
A commercial construction loan is a loan taken out by a business for construction purposes. For example, if a business wanted to expand its property, or, if a company is renting office space and is now in a position to build its own office space. Because construction can come at a high cost, commercial construction loans help to ease the burden. Therefore, the lender will provide funds for materials, labor, land development, etc. Typically, the borrower gets the loan and then pays it back every month with interest. Often a business does not receive the entire loan in one lump sum, but instead, gets the loan in phases as production continues.
Hard Money Loan
The types commercial real estate financing offers also includes hard money loans. A long term loan is one with terms that extend over a long period, such as a 30-year mortgage. However, a hard money loan is a short term loan that allows one to borrow money over a short period, from two weeks to approximately three years. Traditional lenders, such as banks do not offer these kinds of loans, and with these kinds of loans the property is collateral, not how good the borrower’s credit happens to be. Property is considered a hard asset, hence, “hard” money loans. These kinds of loans typically have high-interest rates, and if the borrower defaults, the property may be taken away. An example of a hard money loan scenario is buying an apartment building on the cheap, with the realization that it needs some serious care. You get the hard money loan to make the repairs. Then after the repairs are made, you apply for a traditional loan for about 75 percent of the properties new value. Then you use the conventional loan to pay off the hard money loan.
Commercial Real Estate Blanket Loan
This kind of loan is used for commercial real estate investors who are faced with multiple mortgages and multiple interest rates. A commercial real estate blanket loan allows a borrower to make one payment to a bank to cover everything and with one set of terms. There are typically is no limits to the number of properties you can have under a blanket loan. One advantage of a blanket loan is that the borrower can consolidate different loans into one payment. It is important to note that blanket loans are limited to one state. Therefore, if you have properties in New York and California, you’ll need two blanket loans.
Multifamily living situations are prevalent in the United States. A multifamily loan is used to either buy or refinance multi-unit properties such as a four-unit apartment building. It is a long term loan typically for up to 35 years, and the interest rates are usually at 12 percent or below. This kind of loan is suitable for the first-time real estate investor, and the payments are typically shorter than short-term high money loans. They are especially useful for investors who want to live in the property that has units they’re renting out. This kind of loan typically requires good credit and a representation of cash flow.
Office Building Loans
When you start an office building, you can go with the traditional approaches. However, in the 21st-century loans are tailored for specific needs. Office properties often have special financing needs, and an office building loan is ideal to focus on those needs. The financing options often contain low interest and flexible terms. This kind of loan will be divided based on particular needs. For example, there are office building loans for office property in high-traffic areas. Banks, private investors, and SBA lenders are typically involved in office building loans.
Retail Building Loans
Just like office properties have their unique needs, retail buildings have there’s. Even though shopping online has become the most popular way for customers to find products, brick and mortar shopping is still popular, especially in trendy areas, such as Chicago’s Magnificent Mile. A retail building loan is designed to fit the unique needs of a retail building. Funding from this kind of loan includes funding for things like strip malls, indoor malls, single-tenant retail, community centers, and more.
Industrial Building Loans
Warehouse buildings, industrial buildings, conventional halls – these are all properties that would fall under an industrial building loan. As with loans that focus on specific functions, such as office building loans or retail building loans, the borrower will need to find a lender who focuses on industrial building loans if he or she does not wish to work with a traditional bank. These kinds of loans typically involve extensive checklists and requirements. In some case, an industrial building loan may be combined with a bridge loan if the borrower is working with more than one property.
If you’ve ever thought about investing in the hotel business, hotel loans are a great place to start. As with almost all commercial property, the investment is hefty. Financing for a hotel by way of a hotel loan provides the money needed to not only purchase the hotel but renovate it, furnish it, or build it from the ground up. Hotel loans can come from the bank, but they are becoming more and more popular with private lenders for those who want to bypass bank loans and their often rigid requirements.
Owner Occupied Commercial Loans
This is the kind of loan where the borrower’s business is occupying at least 50 percent of the space. The company is underwritten to ensure that the business is producing enough cash flow to cover the loan. Many documents are needed to qualify for this kind of loan such as three years of tax returns, a personal financial statement, a business debt schedule, and more. These properties usually qualify for SBA loans.
Fix and Flip Loans
A popular term in the 21st-century is “flippers.” These are individuals or groups who buy a property that needs repair at a low price, fix it up, and then sell it at a higher price. The process is known as “fix and flip,” and there are fix and flip loans that are designed for flippers. There are residential flippers, and then there are those who flip commercial property. The process is basically the same, and as with residential flipping, the property needs to be flipped within a short period of time. Sometimes these loans are also called hard money loans. It’s essential to understand flipping a property before the process is undertaken to avoid losing large sums of money.
Portfolio loans are another of the types commercial real estate financing offers. This is when a lender will put several properties under one loan allowing the borrower to make one payment instead of a different loan for each property. A lender loans money to the borrower and then keeps track of the debt in what is known as a portfolio. These are loans that are not sold to other lenders to service the loan. For example, traditional mortgages from a bank are typically handled by the bank the first couple of months and then passed on to a new lender. That is not the case with portfolio loans. Portfolio loans are more borrower focused and allow for more one-on-one attention.
If you combine debt with equity finance, you get mezzanine loans. They are called “mezzanine” because the debt risk falls between the secured loans that lenders, such as banks, make and venture capital that is provided by equity investors with a stake in the business. They are typically not used in start-ups but rather in companies that are already established and that need to be expanded. Usually, the lender can adjust the terms of the loan if need be, which is often not the case with traditional loans. Another characteristic of mezzanine loans is that they typically do not require payment during the term of the loan. Payment is typically given at the end of the loan. In this way, the cash flow of a company can be improved, and the fund can be freed up for paying off existing debt, developing products, investing in working capital, etc.
If you are interested in commercial real estate, examine the kind of property you’re interested in and consider what the best financing options would be. Gone are the days when the only thing you could do is get a traditional loan from a bank. Now there are many types of commercial real estate financing whether they be short-term or long-term in focus. Work with a real estate attorney who can guide you along the way.