5 Types of Commercial Real Estate Loans & How They Work
This article is part of a larger series on Business Financing.
A commercial real estate loan is a lending product from a bank or other financial institution used to purchase, build, or renovate a commercial property. Commercial real estate includes property used for a business purpose, including office spaces, warehouses, storefronts, and production facilities.
There are five primary types of commercial real estate loans:
- SBA 7(a) loan: Best used for long-term commercial real estate loan up to $5 million
- SBA 504 loan: Commercial real estate loans up to $14 million
- Conventional mortgage: Commercial real estate loans with no maximum loan amount
- Commercial bridge loan: Short-term commercial real estate financing
- Commercial hard money loan: Bad credit option for short-term renovation financing
A commercial mortgage will be filed with a commercial real estate loan to protect the lender if the borrower defaults on the loan. Some commercial mortgages are fully amortizing, which means they have monthly principal and interest payments and are paid off at the end of the loan. Others are interest-only loans that include a balloon payment at the end of the loan term.
If you’re looking for a marketplace that has SBA and traditional mortgage loans, check out Lendio. With more than 75 lenders, Lendio’s marketplace will help you get your application shopped around for the best rates and terms. Be sure to review our guide on how to get a small business loan before beginning the application process.
Commercial Real Estate Loans Compared
Loan Type | Rate | Maximum loan amount | Funding speed | Loan term |
|---|---|---|---|---|
4.75% to 7% | $5 million | 30 days | Up to 25 years | |
| $14 million | One to two months | Up to 25 years | |
Conventional Mortgage | 5% to 7% | No maximum | 30 to 45 days | Five to 25 years |
6% to 10% | $40 million (or higher) | Two to five weeks | 12 to 36 months | |
Starting at 6.5% | $3 million | Five to 15 days | One to four years |
1. SBA 7(a) Loan for Commercial Real Estate
Owner-occupancy requirement: This is a requirement of the lender that the borrower’s business must occupy a certain percentage of the property being financed—typically 50% or more.
Small Business Administration (SBA) 7(a) loans are a good choice for a commercial real estate loan due to their low rates. The rates are lower on SBA loans because of the SBA guarantee. There are many requirements specific to SBA 7(a) loans, so make sure to check out our guide to SBA 7(a) loans before beginning the application process.
With an SBA &(a) loan, you can get financing of up to $5 million for up to 25 years. Another advantage over a conventional mortgage is that you can go up to 90% loan to value (LTV), reducing the amount of capital needed for a down payment.
One drawback is a prepayment penalty for loans with a term of 15 years or greater. If you prepay more than 25% of your loan in the first three years, you must pay a prepayment fee. The fee charged against the prepaid amount starts at 5% in the first year and goes down to 1% in the third year.
But despite the prepayment penalty, because of the excellent rates offered, SBA 7(a) loans are ideal long-term loans for buy-and-hold investors.
SmartBiz is an outstanding provider of SBA 7(a) loans. You can enter your information on SmartBiz’s website and get prequalified without impacting your credit score.
2. SBA 504 Loan for Commercial Real Estate
An SBA 504 loan is a two-part loan, with the loans closing simultaneously. One comes from a traditional lender and one comes from a nonprofit lender known as a community development corporation (CDC). You can get up to $14 million for up to 25 years with an SBA 504 loan. Like SBA 7(a) loans, you can go up to 90% LTV on an SBA 504 loan, reducing the amount of the down payment required.
Like all SBA loans, the SBA 504 loan comes with very stringent requirements. Before applying, be sure to read our guide on SBA 504 loans. In general, there are three guidelines to keep in mind when considering an SBA 504 loan:
- Property must be owner-occupied.
- Jobs must be created.
- Business must have a net worth of less than $15 million.
Because of the low down payment, an SBA 504 loan is ideal for a growing company that might not have the capital to make a large down payment on commercial real estate. It’s also good for businesses that might not be in a huge hurry to close on the property, as it can take up to two months (or occasionally longer) to close.
Lendio is a broker that can help you find an SBA 504 lender for your commercial real estate needs. Check out Lendio’s website for more information or to begin the application process.
3. Conventional Commercial Mortgage
A conventional commercial mortgage loan isn’t backed by the federal government and is issued by a bank or lending institution. It can be used to purchase or refinance real estate, such as owner-occupied office buildings, retail centers, shopping centers, industrial warehouses, and other commercial properties.
A conventional commercial mortgage’s advantage over an SBA loan is that it has no maximum loan size, which makes it ideal for large commercial real estate purchases or blanket mortgage loans.
Because these loans can be large and aren’t government-guaranteed, the required qualifications are stricter. A minimum credit score of 700 is needed, and some lenders may require you to be in business for up to five years. The larger the loan requested, the more stringent the financial and credit requirements will likely be.
U.S. Bank offers several different types of conventional commercial real estate loans. You can either begin the application process online or make an appointment with your local U.S. Bank branch or mortgage office.
4. Commercial Bridge Loan
A commercial bridge loan is short-term financing for the purchase of commercial real estate, with extra funds to rehabilitate the property. Commercial bridge loans aren’t permanent financing. Commercial bridge loans can also be used by borrowers who cannot initially qualify for permanent financing.
Unlike permanent financing, which considers the LTV for funding, commercial bridge loans are based on the loan-to-cost (LTC) ratio or after-repair-value (ARV). Because commercial bridge loans are based on these future values, there’s more risk involved to the lender, which often means a higher interest rate than permanent financing.
Before approving a project, lenders will also consider a property’s current condition, renovation plans, and market conditions. In addition, if you have property renovation experience, you’ll be more likely to be approved for a commercial bridge loan. Commercial bridge loans are often used in the same way as construction loans.
AVANA Capital offers commercial bridge loans of up to $25 million with a turnaround time of sooner than two months. You can’t apply directly through AVANA Capital’s website, but you can submit a request for a bridge loan, and a representative will be in contact.
5. Commercial Hard Money Loan
Hard money loans are short-term commercial real estate loans with repayment terms ranging from one to four years. Hard money loans are typically used by businesses that cannot get funding from other traditional lenders either due to credit issues or properties in disrepair. They are considered last resort mortgage financing due to high interest rates and fees.
One advantage of hard money lenders is rapid funding times, with loans funding in a matter of days. However, fees can be very high, and interest rates are better on almost every other type of commercial real estate loan.
Kiavi is our choice for the best hard money lender. With fast funding times, no hidden fees, and no personal income qualifier, Kiavi is a good choice for a hard money loan. Kiavi funds hard money loans of up to $3 million for 12 months. Experienced flippers (five or more flips in 24 months) can get better rates and a dedicated manager.
Bottom Line
When searching for a commercial real estate loan, you should consider what type of property you’re looking to purchase and whether you intend to keep the property long-term or sell it for a profit after renovations.
Each type of commercial real estate has specific uses that are best for different commercial projects. Government-backed CREs will have lower interest rates but, usually, more complicated guidelines. Traditional commercial real estate loans offer reasonable rates and more straightforward requirements.
Be sure to consider all factors, including interest rates, fees, and term lengths before pursuing a commercial real estate loan.
