Commercial real estate loan rates remain at near all time lows, making now a great time for small business owners to purchase or refinance commercial property. A variety of different lenders make commercial real estate loans. This article covers how commercial real estate loan rates work and the interest rates that different types of lenders charge, so you can be a more informed borrower.
Commercial Real Estate Loan Rates Summary – January 2020
Type of Loan*
Typical size of loan
Typical loan term
How easy to qualify?
7.25% to 9.75% (variable)
3.76% to 5.29% (fixed rate on SBA portion, fixed or variable on bank portion)
$1,000,000+ in most cases
5 to 7%
(fixed or variable)
5-10 years with balloon payment
8 to 12%
(fixed or variable)
Up to 80%
6 months - 5 years
10 to 18% (fixed or variable)
6 months - 3 years
*Insurance companies and conduit lenders also make commercial real estate loans, but they primarily work on projects that are worth more than $2 to $3 million. We only briefly mention them in this article because most small businesses are ineligible for these types of loans.
How Commercial Real Estate Loan Rates Work
Commercial real estate loans are collateralized by commercial property, so these loans typically have lower rates than other types of business loans. In general, commercial real estate loan rates are affected by four factors:
- The creditworthiness of the borrower and the business – The higher your credit score and the credit score of the business, the lower your rate will generally be. (Check your credit score for free here.)
- The type of commercial real estate loan that you get – We cover each type of lender in more detail in the next section.
- The size and term of the loan – Larger, longer-term loans generally have higher rates. The exception is hard money lenders, which charge high rates for short-term financing because they work with lower credit borrowers.
- Prevailing market rates – Just like residential mortgage rates, commercial real estate loan rates fluctuate based on how the economy is doing.
Most lenders provide both fixed rate and variable rate commercial real estate loans. For fixed rate loans, the interest rate won’t change during the term of the loan, and your monthly payments will be the same for the full term. The large majority of borrowers don’t qualify for a fixed rate loan.
With a variable rate loan, your interest rate and monthly payments will increase or decrease during the term of the loan based on market rates. Usually, the rate resets every 1 to 5 years. The Prime rate is the most common indicator of market rates. The Prime rate is currently 4.75 today, and banks generally have rates of Prime +1.50 to Prime +3.50 (that equals rates of 7.00 percent to 9.00 percent) on commercial real estate loans.
If you’ve been in business for over 3 years, plan on occupying at least 51% of the building, and have a credit score above 675, you may qualify for an SBA 7(a) loan with SmartBiz. SmartBiz is an experienced SBA lender that offers rates as low as 7.00% and loans up to $5MM.
How Much Do Commercial Real Estate Loan Rates Change Over Time?
While there’s usually not too much variation in commercial real estate loan rates from year to year, there can be significant variation over the course of a 10 or 20 year commercial real estate loan. Since lenders usually peg the interest rates that they charge to the Prime rate, we can see how commercial loan rates have changed over time by seeing how the Prime rate has changed over time.
The graph below shows how the Prime rate has fluctuated over the last 60 years. As you can see, since 2008, the Prime rate has been at a historic low. Before that, however, the Prime rate shifted quite a bit from year to year. If history is a good guide, that means that your interest rate may change over the course of the next several years.
The Type of Lender Has the Biggest Impact on Your Rate
A variety of lenders make commercial real estate loans. They each work with a different set of borrowers and types of properties, and they charge different rates.
SBA Loans for Commercial Real Estate
Maximum Rates: 504 loans: 3.67% to 3.98% and 7A loans: 7.50% to 10.00% (see latest rates here)
With maximum rates in the range of 3.67% to 10.00%, SBA loans are often the least expensive way to fund the purchase of commercial real estate. The Small Business Administration (SBA) guarantees repayment of a portion of the loan, which lowers the risk of making the loan for the lender and increases the favorability of the terms for the borrower.
In general, it’s easier to get an SBA 7a loan for commercial real estate. The 7a loan program is the SBA’s most popular loan program, and it’s quicker and easier to obtain a 7a loan, especially for smaller loan sizes. That being said, 7a loans have slightly higher rates than 504 loans. Rates start at a variable 7.50% and are tied to the Prime Rate.
SBA 504 loans are a better option for loan sizes over $1,000,000. These loans come in three parts: 50% of the loan is from a bank, 40 % is from an SBA-approved Certified Development Company, and 10 % is the borrower’s down payment. The rates on the CDC portion of the loan are in the 3-4 % range and are fixed rate. The rates on the bank portion are in the 5-6 % range and may be fixed or variable. Our recommended SBA 504 lender it Liberty SBF. If you’ve been in business 4+ years, are profitable, and looking to borrow $1,000,000+, set up a time to speak to a Liberty SBF loan officer today.
If you’ve been in business for 3+ years, plan on occupying at least 51% of the building, and have a credit score above 675, you may qualify for an SBA 7(a) loan with SmartBiz. SmartBiz is an SBA lender that offers rates as low as 7.00% and loans up to $5MM.
Conventional Bank Loans
Average Rates: Approx. 5 to 7 %
According to C-Loans, over 70 % of commercial real estate loans are made by banks. Banks generally work with borrowers who have strong credit profiles and mid-sized projects (above $250,000), and they offer competitive rates.
Rates on conventional bank loans range from 5 to 7 %, just slightly higher than rates on an SBA 504 loan. Most borrowers are approved for variable rate loans, where the rate resets every 1 to 5 years.
Just as with a 504 loan, you need to have a good credit score (above 660) to qualify. The property doesn’t need to be owner occupied, however, making this a good option for a wider range of commercial properties. Most banks will want a down payment of at least 20 % and will give loans with 5-10 year terms. This makes the upfront out-of-pocket expenditure and the monthly payments higher than they would be on an SBA 504 loan.
Banks also often charge a prepayment penalty if you pay off the loan early. Usually, the penalty is 2-3 % of the outstanding loan balance, but sometimes, prepayment penalties are on a sliding scale, decreasing as loan maturity nears. SBA 504 loans also have a prepayment penalty, but only for the first 10 years.
Hard Money Loans
Average Rates: Approx. 10 to 18 %
About 20 % of commercial real estate loans are hard money loans. A hard money loan is a non-bank loan funded by private investors or a private company. Of the available types of commercial real estate loans, hard money loans have the highest rates, ranging from about 10 to 18 %.
The reason they’re so expensive, says Nick Marra, Senior Vice President at Webster Bank, is because hard money lenders lend primarily based on the property, not on the borrower’s creditworthiness. “Because they are not verifying income and lending strictly based on the asset,” he explains, “the interest range is much higher than traditional loans.” In addition, he says that upfront fees can significantly increase the cost of hard money loans.
Hard money loans are very short-term loans. The average term is 6 months to 2 years. Many hard money loans are called “bridge loans” because they give you quick interim cash that you then refinance into a longer term bank loan or SBA loan. Don’t expect hard money lenders to cover the full cost of your project either, says Marra. Their limit on loan-to-value is usually around 55 %.
Speak with our recommended hard money lender, South End Capital, for fast approval and funding as quick as 2 weeks.
Online Marketplace Loans
Average Rates: Approx. 8 to 12 %
A newer source of financing for buying commercial real estate are online marketplaces which match borrowers who want to purchase real estate and investors who are willing to fund them for a return. These lenders are sometimes called “soft money lenders” because they charge more than banks but less than hard money lenders. Their rates are typically between 8 to 12 %.
A small percentage of commercial real estate loans are made by life insurance companies and conduit lenders. These lenders charge very low rates, but the average small business owner won’t qualify. They have very selective approval criteria and generally only fund multi-million dollar projects, such as hotels, shopping malls, and high-rise complexes.
How Commercial Real Estate Loans Are Structured
There are three main ways in which Commercial Real Estate Loans can be structured:
- Fully amortizing loans
- Interest rate resets
- Balloon loans
Fully Amortizing Loans
When you have a fully amortizing loan, you pay off the entire principal and interest on the loan during the term of the loan. A good example is the SBA 504 loan, which is a fully amortizing 20 year loan. During that time, you make monthly payments of principal and interest. By the end, the loan is fully paid off.
Most commercial real estate loans issued by banks are balloon loans, with the exception of SBA loans, which are not permitted to have balloon payments. With a balloon loan, the amortization period is longer than the term of the loan, leaving you with a large balance to pay off at the end of the term. At that stage, the small business owner either pays the remaining balance in full, or more commonly, refinances the loan so he or she can continue to make monthly payments.
Example: Say your bank gives you a $500,000 commercial real estate loan with a 5 % interest rate and a 10-year term that’s amortized over 30 years. Your monthly payments for 10 years would be approximately $3,300. At the end of the tenth year, you would owe a $314,407 balloon payment. Most people can’t afford to pay such a large amount of money all at once, so they would probably refinance this with a new loan. Use this Balloon Loan Calculator to learn more.
Interest Rate Resets
Variable-rate commercial real estate loans typically have an interest rate reset. The borrower is charged a fixed interest rate for an initial period, commonly 1 to 5 years. At that point, the interest rate changes based on a market rate such as the Prime rate. The borrower pays this new interest rate either until the loan reaches maturity or until the next reset date. Use our Commercial Real Estate Loan Calculator to estimate payments on a loan that has a reset rate.
Even with the rate resets, buying commercial real estate can result in significant savings when compared to leasing commercial real estate. In can be a great way to grow a business’s assets and there are certain tax benefits as well. Read our guide for a full analysis of buying vs leasing commercial real estate.
As your business grows you may need to purchase commercial real estate or refinance an existing commercial real estate loan. Commercial real estate loan rates vary widely depending on which type of lender you work with. Most commercial loans these days are made by banks or hard money lenders, which gives options for those with great credit and those with lower credit. Whichever financing option you choose, make sure you understand exactly how much you’ll have to pay and when.