Types of Commercial Real Estate Loans

Types of Commercial Real Estate Loans

Commercial real estate loans are utilized to purchase business property to operate and buy commercial properties for generating income. How the real estate is used determines the right kind of commercial mortgage for you.  Land and construction loans are the common loans taken in real estate. Commercial real estate loans could be as short as few months or as long as 30 years.

Commonly, office complexes, hotels, apartments, retail centers along with acquisition, development and the construction of the mentioned properties are completed through commercial real estate loans. Similar to residential loans, independent lenders and banks are actively in making commercial property loans.  Pension funds, insurance companies and private investors also make commercial real estate loans. The incentives for lenders for making commercial real estate loans are they attract wealthy tenants and sometimes are able to make quite a handsome revenue amount.

Though the risk involved in commercial real estate loans is high, the incentives of making money are higher. Being informed about the different loan options and how they can actually help both commercial building owners and real estate professionals in making better decision after understanding the various numerous financing options available to them in times of need.

Types of Commercial Real Estate Loans:

Listed below are the types of commercial property loans:

  • Bridge Loan:

In bridge loan, the borrower gets instant cash flow to be able to finance the immediate needs and requirements of a project. Bridge loans have a term period of one year or so and are temporary. Bridge loans are usually obtained when the borrower is actually waiting for the long-term financing to come through. Private lenders usually offer bridge loans. For a bridge loan, the borrower needs to have excellent credit score and a proof of income. Furthermore, a borrower has to show that they have sufficient cash to cover the existing expenses of the property and the new loan.

  • Real Estate Purchase Loan:

Similar to adjustable rate and fixed rate commercial mortgages; real estate purchase loans have certain requirements. In order to qualify for real estate purchase loan the borrowers must have an impressive credit score of 700 or higher.  Borrowers are also required to have substantial savings in personal and business bank accounts.  The commercial property has to be used by the lenders as collateral and the rate of the loan is determined by following the loan-to-value ratio.

  • Hard Money Loan:

The owner has to list the commercial property as collateral to qualify for hard money loan even if the loan is taken for the purpose to save it.  Private lenders commonly offer hard money loan as they are not obligated to meet the same standards followed by the mainstream commercial lenders. Therefore, there is a higher risk of default and a high interest rate.

Hard money loans are temporary and are only offered when time is of critical importance like a foreclosure proceeding.

  • Joint Venture Loan:

When the partners of a property share the profits and losses of a property equally, a joint venture loan tends to be the appropriate option of commercial real estate loan. If neither of the party is able to gain advantage, this type of loan can be beneficial.  Investment firms and private investors offer joint venture loans usually. Normally two of the partners of a group apply for the financing.

The relationship between the loan applicants does not have to be official or extend beyond the financed property unlike real estate partnership.

  • Participating Mortgage:

The lender in participating mortgage, is allowed to share in part of the profit acquired produced by commercial property. A monthly mortgage payment is received by the lender with interest along with a share in the rental income of the property or the sales proceeds.

Among commercial property loans and property development finance, participating mortgage is popular for retail and office properties as the financial stable tenants sign long-term leases.

Commercial Real Estate Loans

Requirements of Commercial Real Estate Loans:

Commercial real estate loans are made to business against owned real estate. There are land and construction loans as well as property development finance.  Commercial property loans tend to have more severe criteria compared to residential loans due to having a direct impact on the economy and financial status of company.

A commercial borrower has to meet all the below mentioned requirements to receive a loan:

  • Documented Property Value:

The commercial property that is being offered as a collateral/ security has to pledge to lender in exchange for loan and its value must be worth the amount of mortgage that has been requested. A loan-to-debt is the commonly used ratio for determining whether property is acceptable.  The mortgage amount is divided by the recent appraisal and net income of borrower or a licensed professional determines the market value.  The resulting outcome has to be 75% of commercial loan.

  • Property Cash Flow:

The cash flow of the business is compared with the debt carried by the business by underwriters of commercial real estate loans. A steady source of net income that has to be 20% higher than the carried debt is generally looked for by the lenders. Detailed statements showing the budget aspects, expenses and income of the business and the borrower’s experience of running the company have to be provided to the lender.  The lender may request evidences of both assets and savings can be converted into cash as proof of borrower for paying the mortgage for specified time period in case of a massive financial setback.

  • Guarantor’s Assets &Income:

Sometimes the assets, income and credit of guarantor of the commercial real estate loan are utilized in the process. The owner is usually the guarantor of the business and guarantees that the loan shall be paid if business default. Lender may require business’s guarantor for mortgage receiving. The assets and income of guarantor have to be documented along with this credit score and history so that the lender’s requirements can be met in order to further proceed with the commercial loan.

Please visit this for more info on Commercial Lending Types.

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