Commercial real estate (CRE) is a very important industry in the world economy, as it offers space for businesses and investors and enables developers to grow wealth efficiently. However, acquiring commercial properties involves high costs and complex processing. Therefore, most investors rely on commercial real estate lending to facilitate acquisitions, construction, and upgrades.

Whether you are a business owner looking for a new office, a real estate investor wanting to increase your assets, or a builder with an upcoming project, having the right knowledge about commercial real estate lending is important.

From understanding property loans and their importance to their types to how to secure one, in this blog, we will highlight everything you need to know about commercial real estate lending. 

We will first begin by knowing what real estate lending is. Let’s get started. 

Understanding Commercial Real Estate Lending

Commercial real estate lending is defined as a type of financing targeting specific types of real estate, including but not limited to office buildings, retail shops, industrial warehouses, hotels, and multifamily apartment buildings.

In contrast to residential mortgages, which are granted based on a borrower’s earnings and payment history, CRE loans are estimated to be based on the following:

• The potential income from the asset

• Financial statements of the borrowers’ business

• Economic factors and worth of the asset

Commercial loans usually have more significant loan values and risks than domestic ones. As a result, borrowers are subject to extensive analysis prior to initiating financing. The loan terms, including repayment, interest rates, and structure, can greatly differ for various lenders and financial institutions and depend on the borrower’s funds and the specific commercial property.

Moving forward, let’s look at the significance of commercial real estate in the economy. 

The Importance of Commercial Real Estate in The Economy

The commercial sector in the real estate industry is one of the top investment industries globally. The CRE Market in the United States alone was worth $8.8 trillion in the year 2021. Therefore, it has become a source of economic development.

Commercial Properties are vital for:

• Business Expansion: They offer office space, retail premises, and industrial buildings for business operations.

• Employment Opportunities: Real estate development projects create jobs for construction workers, architects, property managers, and service providers.

• Wealth Creation: CRE is indispensable for institutional clients, REITs, and individual investors because it offers long-term wealth.

One of the defining features of CRE is the amount of debt used to fund its transactions. Such a debt-heavy financing structure is evident because most commercial real estate transactions combine funded loans and equity investments.

Now, let’s look at the various types of commercial real estate loans. 

Types of Commercial Real Estate Loans

Just as in other sectors of the economy, commercial real estate financing is not and does not need to be homogeneous. A range of loans can be issued depending on the kind of property, the strategy of investment, and the amount of funding the borrowers seek. Here are its various kinds. 

Owner-Occupied Commercial Mortgages

Owner-occupied commercial mortgages are the ideal solution for business owners looking to purchase commercial property while occupying at least 51% of it. These loans come with terms ranging from 15 to 25 years, making them a long-term investment in your company’s future. However, securing this type of mortgage requires good credit and a minimum Debt Service Coverage Ratio (DSCR) of 1.25. This ensures the business has enough income to cover loan payments. Lenders will thoroughly evaluate your business’s financial strength and cash flow generation ability before approval, making financial stability a key factor in eligibility.

Income-Producing Property Loans

Income-producing property loans provide the necessary funding if you are looking to invest in commercial properties that generate passive income. These loans apply to properties such as office spaces, apartment buildings, and retail centers, where rental income is the primary revenue stream. The loan amount is determined based on the property’s Net Operating Income (NOI) and its ability to sustain payments. This loan's real estate lending rates range from 5 to 30 years, with both fixed and floating interest rate options. This allows investors to choose terms that best fit their financial goals.

Construction Loans

Developers starting new construction projects can take advantage of construction loans. This real estate lending is designed to provide funding throughout the building phase. Due to their risks, these loans require detailed project plans and strong financial backing. A common form of construction loan is the bridge loan, a short-term financing option lasting 1 to 3 years. Its payments cover only the interest during construction. Repayment usually occurs through property sales, refinancing, or transitioning into permanent financing once the project is complete.

Bridge Loans

Bridge loans act as a financial safety net for investors needing temporary funding while waiting for permanent financing. With a fast approval process but higher interest rates, they are particularly useful for projects that involve property upgrades, replacements, or new developments. These short-term loans typically last between 6 to 24 months. This helps investors seize opportunities quickly while working towards securing a long-term financing solution.

SBA 504 and SBA 7(a) Loans

For small businesses looking to purchase commercial properties, SBA 504 and SBA 7(a) loans offer government-backed financing with competitive, long-term rates. The SBA 504 loan is ideal for real estate purchases, offering a low 10% down payment and fixed-rate financing. Meanwhile, the SBA 7(a) loan provides funding for real estate purchases, business expansion, and working capital needs, making it a versatile choice for growing businesses. These SBA loan programs open doors to numerous business opportunities to ensure small businesses can access the resources they need to thrive.

Furthermore, we are now going to talk about the various types of real estate lenders. 

Types of Commercial Real Estate Lenders

There are several types of avenues that offer real estate-secured lending. Let’s have a look at them. 

Traditional Banks and Credit Unions

Traditional Banks and Credit Unions are at the forefront regarding reliably low-risk business financing and are known for having some of the best interest rates in the industry. These firms generally offer long repayment terms, which attracts those who pass their rigorous lending rules. However, borrowers who qualify for these terms are required to have outstanding credit scores and excellent financial records, which assures lenders that risks will be minimal.

Private Lenders and Hard Money Lenders

When speed is a priority, borrowers can tap into short-term finances provided by private and hard money lenders. These lenders offer alternative short-term loans with minimal documentation as compared to traditional banks. The downside is their unwillingness to take on high-risk investments, which means they charge higher interest rates and costlier real estate lending terms. These lenders can be helpful for investors who are undertaking short-term projects with high risks because of their quick approval times.

Pension Funds and Life Insurance Companies

Investments made by institutions such as pension funds and life insurance companies are low-risk and high-value, giving them an advantage for long-term funding. These lenders normally charge a fixed rate on interest, which is excellent for the borrowers during the repayment phase. Nevertheless, these lenders prefer sizable loans of $10 million or more, usually serving established firms and investment opportunities instead of smaller ones.

Government-Backed Lenders

Government-backed lenders are very important for small-scale businesses trying to buy commercial property. This type of financing is gifted with a variety of low-down payments, which makes it suitable for start-ups or expanding businesses. However, the perks of this kind of financing are overshadowed by the complicated and often document-heavy application process, which makes approval difficult compared to other options.

Furthermore, we will now look into the essential terms to secure commercial real estate lending. 

Vital Terms in Commercial Real Estate Lending

There are a few essential terms to remember when it comes to real estate lending. Let’s have a quick look at that. 

• LTV (Loan per property value) – It’s a measure of the loan relative to a property’s cost. A higher LTV value indicates the greatest risk for the lenders.

• Debt-to-equity ratio (Investors have acquired shares in the company) – Calculate the amount of debt and divide it by income to see how one can pay off a property loan. A value lower than 1.25 is ideal but not preferred by lenders.

• Time for repayment of a loan – How long does it take to return the sum of the loan taken?

• Balloon Payment – A single large payment made at the end of the loan term.

• Expected ROI on the property (Cap rate) – It’s an index that evaluates stakeholder investment return opportunities.

We understand that by now, you must be thinking about successfully securing commercial real estate lending. That is exactly what we are going to talk about now. 

How do you get a Commercial Real Estate Loan?

1. Have Accurate Financial Statements

When requesting a loan, You must prove your creditworthiness, income, and business stability. This means that knowing your lender is important because you will need to provide these documents:

• Business-to-business and profit and loss statements

• Tax returns and credit reports

• Lease documents

2. Understanding the Classification of Loans

Choose between long-term mortgage loans, construction loans, or bridge loans based on your desired investment outcome.

3. Engaging with the Right Type of Funder

People specialize in lending for different types of properties. Ensure they are in line with your project goals before making a selection.

4. Appropriate Planning for Repayment

Lenders like borrowers who have clear exit strategies through sales, refinancing, or earning enough income from rent.

Common Mistakes that People Make when Lending for Commercial Real Estate

Here are some of the mistakes that you should avoid if you wish to get real estate-secured lending. 

• Overleverage: Putting yourself in unfavorable debt situations is dangerous, especially during harsh economic times.

• Taking the Market for Granted: Not considering factors such as the potential local demand, vacancy rates, and property appreciation can be detrimental.

• Negligence Towards the Fine Print of the Loan: Balloon payments, hidden fees, and prepayment penalties could alter profitability and must be taken seriously.

In a Nutshell

Securing commercial real estate lending is no less than a win. A commercial real estate loan can be very useful for an investor or business seeking property to build or acquire. However, investor success depends on the proper selection of loans, lenders, and financing strategies.

Looking For a Committed Commercial Real Estate Lender?

Here at Capital Key Lending, we are experts at creating customized financing solutions for individual clients. We have successfully assisted businesses for over two decades with securing the best loan terms for their real estate investments.

Call us and schedule a consultation to discuss the best financing options for you!