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TLS LEARN: Commercial Real Estate Financing 

commercial real estate financing

TLS LEARN: Commercial Real Estate Financing 

Commercial real estate is considered to be any property that’s designated to make profit. Business owners looking to purchase or renovate commercial real estate such as a retail center, apartment complex or warehouse, might consider applying for a commercial real estate loan. 

commercial real estate financing
Commercial Real Estate at 1000 New York Avenue, Huntington

COMMERCIAL REAL ESTATE FINANCING VS RESIDENTIAL REAL ESTATE FINANCING

Commercial real estate is very different from residential real estate. Therefore, commercial real estate loans vastly differ from residential mortgages. Since there is a higher risk factor associated with small businesses, commercial real estate borrowers will undergo a higher level of scrutiny than a residential borrower.

The five factors commercial real estate lenders review:

  1. Your personal FICO credit score 
    • Usually ranging from 550 to 700, depending on the lender and loan type
  2. Your net worth 
    • The difference between your liabilities and your assets 
  3.  Your liquidity 
    • Financial statements indicating cash flow for the property being financed
  4.  Your business experience 
    • Specific to the real estate you’re financing 
  5. Your income
    • Personal and commercial property portfolios, with several years of financial statements and income tax returns

REPAYMENT TERMS

Commercial real estate repayment terms are also very different from residential loans. Usually commercial real estate loans have shorter repayment terms. And depending on the lender and loan type repayment terms can range from 6 months to 20 years. Commercial loans are also more likely to have restrictions on prepayment and/or prepayment penalties, than residential loans. 

RELATED: TRADITIONAL MORTGAGE VS. HARD MONEY LOAN

LOAN TYPES

There are four main types of commercial real estate loans: conventional commercial real estate loans, commercial hard money loans, bridge loans and SBA loans. 

  1. Conventional commercial real estate loans 
  • Most similar to residential mortgages 
  • Offers the longest repayment terms, typically a 5 to 10 year schedule
  • Comparatively low interest rates, usually ranging from 4.7%-6.75%
  • Common requirements – at least one year of business financial data and a personal credit score of 700 or more 
  • One of the longest approval processes, underwriting can take months
  1. Hard Money Loans
  • Private investors (individuals or companies) lending money based on the value of the property  
  • Limited investigation of the borrower’s financial records
  • Financing usually can be secured in days or weeks, since the underwriting standards for hard money loans are lower than conventional loans
  • Repayment periods are usually short-term, ranging from 6 to 24 months
  • With interest rates ranging from 10-18%, they’re higher than conventional loans
  1. Bridge Loans
  • Short term financing with loan terms ranging from 6 months to 3 years
  • Borrowers typically need a credit score of at least 650 and a 10-20% down payment
  • Interest rates usually  from 6-9%
  • Approval process takes 15 to 45 days
  1. SBA Loans
  • Offered by the U.S. Small Business Administration
  • Processed through large banks, credit unions and certain specialized lenders
  • Two types of applicable loans – SBA 7(a) loans and SBA 504 loans
  • SBA guarantees repayment of a portion of the loan resulting in low interest rates
  • Borrowers must meet specific requirements regarding business size, location, business type, credit history, business background, plus additional terms for existing businesses
  • Additional requirements include: collateral, a 10% down payment and a personal guarantee from anyone owning 20% or more of the business 
  • Repayment terms vary for both loan types depending on the purpose of the loan and pre-payment penalties apply

The Liquidity Source Specializes in Commercial Real Estate Financing, servicing companies in the metro NYC area. If you are looking for a customized solution for financing your real estate project, please contact us for a virtual consultation!

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