While home mortgages are generally made to individual borrowers, commercial real estate loans are typically made to corporate entities (e.g., corporations, developers, limited partnerships, funds, and trusts).
Whether you are getting a residential mortgage loan or commercial real estate loan, the lender will use the property as collateral against debt. The property the loan finances serves as collateral, and the lender places a lien against the property, which allows it to be taken away if you do not pay it back in a timely manner. The liens means if a company cannot pay its loan payments, and liquidating collateral (i.e., foreclosure of a property) does not generate enough cash to pay back the loan, then the borrowers are personally liable to make up the difference.
The business entity may have no business track record or credit score, in which case a lender can require that the business entity’s principal or owners guarantee the loan.
When evaluating loans for commercial properties, lenders look at the security for the loan, the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns, as well as financial ratios, such as loan-to-value ratios and debt-service coverage ratios. With commercial real estate loans, however, the term of repayment generally varies between five to 20 years, with some types of commercial loans providing shorter-term financing, with payments expected within one year. You can generally obtain permanent loans from any commercial lender, but these are not appropriate for short-term financing needs: They generally come with amortization schedules and a five-year repayment time frame or longer.
Commercial bridge loans may also be used by real estate investors looking to renovate and flip an investment property for a short-term profit. Bridge loans are generally used to bridge the funding gap until longer-term forms of funding are secured.
If an investor cannot afford the down payment required for some commercial real estate financing options, he or she may be able to find a investing partner willing to supply the funds necessary for a qualifying loan, such as a conventional bank loan. You can obtain financing for commercial real estate without money down, using various financing methods, such as a Purchase Money Mortgage, investing partner, or hard money lender. Commercial lenders typically offer rates and terms that are competitive with conventional banks, and applying for a loan can typically be done from the comfort of your couch.
You will need to compare business loan rates across different lenders to see which is the best fit. Understanding the differences among the types of loans is essential for getting the funding that you need for your business. Use the following information as a guide to getting started with commercial real estate financing, and before you know it, you have a better idea of how commercial property loans are different than home loans, the different types of loans and lenders that are available, and a broad understanding of how commercial real estate financing works.
You can apply for a commercial real estate loan through a bank, credit union, or online lender that offers commercial loans. To qualify for a commercial loan, you will need good credit, a 25% or greater down payment, and you are planning on using most of the property being funded for your business. To get a commercial loan, you need to use a majority of the property being financed for your own business purposes.
Using means you may still rent some of the property backing it, but a minimum of 51% of the property must be used for your own business. Lenders generally require that commercial properties are owner-occupied, meaning that your business would have to take up at least 51 percent of the building.
Buying commercial property, to establish a new structure — such as a shop, office, or warehouse — or expand an existing structure is usually a big commitment for a small business, and it is typically funded with a commercial real estate loan. You might use a commercial property loan to construct a standalone building, purchase office space in a larger, mixed-use commercial hub, or even buy a residential property intended for rent to tenants.
Commercial real estate loans not only help to fund a property, they could help fund any building projects you require. Most banks offer commercial finance on various types of properties. Insurance companies, pension funds, private investors, and other sources, including the Small Business Administrations 504 Loan Program, supply capital for commercial properties.
With an SBA 504 loan, small business owners must use funds to finance a commercial real estate purchase or equipment, renovation of existing commercial real estate, or refinancing an eligible commercial real estate loan or for construction. Within the SBA lending categories, there are multiple loan products available for buying, building, or renovating commercial properties.
Commercial loans can be used for new construction, renovations to properties, and to buy land or buildings. These loans are provided by private companies and are intended for borrowers who cannot qualify for conventional financing. Commercial mortgages may also be used for the purchase and development of land upon which a single-family home or multifamily dwelling would be built and sold.
Owner-occupancy financing allows a homeowner–mostly a real-estate investor, but anyone can take advantage–to buy the house directly from the seller rather than taking out a mortgage. A loan for a property in sole proprietorship status would be considered personal, not business, putting your personal wealth at risk should you default on your loan.
These are your base loans, either fixed-rate or adjustable-rate loans, offered by most commercial lenders, that are most similar to consumer mortgages. The terms and rates applied to each loan will vary from one lender to another, but borrowers can get adjustable-rate or variable rates starting as low as 3 percent, and balloon payments–a series of smaller payments leading up to one, larger payoff–if they need to lower their monthly payments early in a loans terms. CRE loans exist to fund properties used for commercial purposes, such as malls, warehouses, condominiums, and office buildings.
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