Hard money lending is one of many ways to finance commercial real estate. Learn more about various types of commercial real estate loans and how they work.

Commercial real estate loans allow investors to finance real estate purchases and renovations. These types of loans are different from other business loans. Some commercial real estate loans share similarities with residential mortgages, but they’re also different. Read on to learn more about the different types of commercial real estate loans.

What are commercial loans?

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The simplest definition of a commercial real estate loan is that it is a loan intended for business or investment purposes. Borrowers are usually business entities, such as corporations or partnerships, rather than individuals. While a residential real estate loan must go towards a borrower’s primary or, in some cases, second home, commercial loans are available for a wide range of uses. These may include:

Purchasing property for a business location, such as an office, retail space, manufacturing facility, or warehouse
Financing construction of a new building or facility
Obtaining ‘permanent” financing upon completion of construction
Renovating or upgrading an existing property

Purchasing property for investment purposes, such as fix-and-flip projects or rental properties

How do commercial loans work?

The application process for a commercial real estate loan may be superficially similar to that of a residential loan.

Apply; discuss your goals with the lender
Processing and underwriting
Closing and funding

The requirements for commercial loans tend to be more stringent and the loan terms are likely to be different. For relatively new businesses, lenders will want to look at the financial status and credit history of both the businesses and the owners. They’ll check your debt-to-income ratio as well. Asset-based lenders, like hard money lenders, may qualify you based on physical assets rather than credit score.

What are the interest rates on commercial real estate loans?

Interest rates tend to be higher for commercial real estate loans than for residential mortgages. Just like any other type of loan, the interest rate will depend on factors like the business’ financial situation and the term of the loan.

How long will my business have to repay a commercial real estate loan?

Loan terms are often much shorter for commercial real estate loans. A traditional commercial mortgage could have a term of as few as 5 years or as many as 20 years. Other types of loans, such as hard money loans, could have even shorter terms between 6 months and 2 years.

Are there any commercial real estate loans with no down payment?

Zero-down commercial loans will be hard to find outside of government loan options. Another route to avoiding a down payment would be to make a deal with the current owner of the commercial property. Thirdly, if you have a strong financial profile, a hard money lender may discuss using your current hard assets as collateral in lieu of their normal down payment amount. This would be determined on a case-by-case basis.

Can I buy a commercial property with a residential mortgage?

A condition of borrowing money with a residential mortgage is that you have to use it to purchase residential property. Generally speaking, you cannot use a residential mortgage to buy a property that is zoned or otherwise designated for commercial use.

It may be possible to use a residential mortgage to buy residential property for a profitable purpose. Many programs allow the purchase of owner-occupied properties like duplexes, where the owner can live in one unit and use the others for rental income. Buying a second home, vacation home, or rental property may also be possible with some residential mortgages. But technically, these examples are not of commercial real estate. They’re still residential.

Types of commercial real estate loans

Small Business Administration loans

The Small Business Administration (SBA) has two loan programs that can be used for commercial real estate.

SBA 7(a) loan — This is the SBA’s flagship loan program. It provides up to $5 million in financing to buy commercial real estate, purchase land in order to build new commercial property, or renovate existing facilities. Fixed or variable interest rates are available. Loan terms may go as long as 25 years. It may be possible to borrow money with no down payment through this program.
SBA 504 loan — The 504 loan program can be used to finance the purchase of owner-occupied real estate, up to a maximum loan amount of $5 million. This type of loan can be complicated. A loan consists of two parts, with each one coming from a different lender.

Conduit loan

The funds for conduit loans, also known as commercial mortgage-backed securities (CMBS), come from the sale of other commercial mortgages on a secondary market. This type of loan often involves a prepayment penalty. The loan term can be anywhere from 5 to 30 years and often features a balloon payment at the end.

Hard money loan

Hard money loans are short-term, asset-based loans from private lenders. They don’t require many of the stringent borrower guidelines that government and bank loans do. Sometimes they’re referred to as bridge loans because they’re meant to bridge the gap of time between the purchase and finding longer-term financing (or selling the property). Although a hard money loans’ interest rate will be higher than a bank’s loan, a huge advantage is a faster closing time. We’re talking one or two months with a bank, compared to seven days with a private hard money lender.

Eyeing a commercial property?

Capstone Capital Partners provides hard money loans for a wide range of Texas real estate projects, including both commercial and residential ventures. Applying is easy, and borrowers can expect fast, flexible financing and friendly service. Tell us a little about your project, and let’s see what your best options are!

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Types of Commercial Real Estate Loans, Requirements, & More