A Quick Guide to Commercial Real Estate Loans
A commercial real estate loan is a type of mortgage that involves securing the funds with commercial property as collateral. This can be anything that can help in generating income for the business, such as an office, a hotel, an apartment building, etc. Businesses can avail commercial real estate loans to acquire, develop, or construct a commercial property with an objective to resell, lease, or rent the space to others. Generally, developers, corporations, and real estate investment trusts go for this financing option.
Most banks and independent lending bodies offer commercial real estate loans to businesses after analyzing the potential risk factors and credibility of the borrower. Note that the terms and conditions in this type of business funding can vary from lender to lender. The loan period for commercial property loans typically ranges from 5 years (or even less) to 20 years, while the amortization interval can be longer than the loan term. For instance, if a borrower applies for a commercial real estate loan for 5 years with an amortization term of 15 years, he/she would be required to pay monthly installments in the 5 years period that equals the amount as if the loan was to be repaid over 15 years. This is followed by a final lump sum payment to repay the balance loan amount.
Lending institutions mainly consider the value of the property put as collateral as well as the credibility of the borrower to approve the loan. Some banks and online lenders might also require the borrower to submit financial statements and income tax returns for the past 3 to 5 years, as well as a description of their loan-to-value ratio and/or debt-service coverage ratio.
Types of Commercial Real Estate Loans
There are different types of commercial real estate loans aimed at the different needs of businesses. The most common types of business financing include:
- Permanent Loans: These work like basic mortgage loans for a commercial property. Permanent loans usually have a five-year term and can feature a longer amortization period.
- SBA Loans: These loans are guaranteed by the Small Business Administration (SBA), which means there is often less risk for the lender. However, getting approval for an SBA loan can be a lengthier process.
Bridge Loans: These are short-term mortgage loans, which usually go from a 6-month term to 3 years. Bridge loans can benefit businesses that require some quick funding to resolve their immediate financial needs.