Loans for Commercial real estate are not all equal or the same. They play a crucial role in helping individuals and businesses finance their commercial property purchases but to get the best financing fit you need to understand the differences between commercial real estate loans. They can be used to expand your business, invest in income-generating properties, or acquire a new space for your operations, and each is unique.
In this blog, we will explore the various types of loans for commercial real estate, their features, and their potential benefits and drawbacks. Note that the availability and terms of these loans are as varying as their lenders and as your specific circumstances. Let’s dive in!
Traditional Commercial Mortgages
One of the most common types of commercial real estate loans (CRE) is the traditional commercial mortgage. These loans are typically offered by banks and traditional lending institutions. They have fixed or variable interest rates and repayment terms ranging from 5 to 30 years.
These mortgages are suitable for a wide range of commercial property purchases, including office buildings, retail spaces, and industrial properties. A CRE is collateralized by the commercial property you are buying (or refinancing). The property’s appraised value (an opinion of the fair market value) will determine the loan amount, along with each borrower’s creditworthiness and down payment or equity. Traditional Commercial Mortgage Lenders expect borrowers to have “skin in the game”, via down payment or equity in the property.
Small Business Administration (SBA) loans are government-backed loans designed to support small businesses. SBA loans can be used for various purposes, including purchasing, refinancing, or renovating commercial properties. With favorable terms and lower down payment requirements than traditional CREs, SBA loans are popular, but eligibility criteria are limited.
SBA loans are offered by approved lenders and can be particularly beneficial for startups and businesses with limited financial resources. However, the application process for SBA loans can be more extensive, demanding, and time-consuming than traditional commercial mortgages.
Blanket loans are a type of commercial real estate loan that allows borrowers to finance multiple properties under a single loan. It also allows borrowers to use multiple properties as collateral to buy one commercial property. Real estate investors, or businesses looking to acquire or refinance multiple properties simultaneously, find blanket loans an ideal choice.
Blanket loans offer convenience by consolidating multiple mortgages into one, simplifying the payment process. These loans can also provide flexibility on the properties that can be financed. They allow borrowers to include residential and commercial properties in a single loan.
Bridge loans are short-term loans designed to bridge the gap between the purchase of a new property and the sale of an existing one. These loans are commonly used by real estate investors or businesses that need immediate funding to seize time-sensitive opportunities.
Bridge loans typically have higher interest rates and shorter repayment terms compared to traditional commercial mortgages. They provide quick access to capital. This allows borrowers to secure a property before securing long-term financing or selling an existing property.
Mezzanine loans are a type of financing hybrid between the senior debt (traditional mortgage) and the equity investment. On a commercial property purchase they can fill the gap between the amount of senior debt and total project cost.
Mezzanine loans are typically provided by private equity firms or specialized lenders. These loans carry higher interest rates and are considered riskier than traditional commercial mortgages. Yet, they can provide additional leverage and flexibility to borrowers unqualified for the full financing amount through senior debt alone.
Understanding the different types of commercial real estate loans is essential when navigating the financing process for commercial property purchases. Each loan type comes with its own set of features, benefits, and considerations. By exploring thse loan options, real estate investors and business owners can make informed decisions about financial solutions.
If you have questions on loan options or are looking for make-sense financing, contact us at King Capital Advisors. We have private investors interested in make sense deals that fall outside of the SBA narrow parameters.
Remember, it’s always advisable to consult with a financial advisor or commercial loan expert to assess your specific situation. Once you’re armed with the information you need, you can determine the most appropriate loan type for your commercial real estate endeavors.