Commercial real estate loans are an important part of a business or individual’s investment strategy, as well as for businesses looking to purchase or develop a property for their own needs.

Whether you are looking to buy new office space, expand a facility, or invest in an income-producing commercial property, understanding how to get a commercial real estate loan is an important step.

What Is a Commercial Real Estate Loan?

A commercial real estate loan is a loan that is used to purchase a commercial property. These loans can be obtained from traditional commercial lenders, such as banks, and can be used to finance the purchase of land, buildings, or any other type of physical property. Commercial real estate loans may also be used to finance the renovation or construction of a commercial property.

Commercial real estate loans are different from residential mortgages in that they typically have shorter loan terms and may require a larger down payment. Additionally, some commercial real estate loans require the borrower to provide personal guarantees, such as business assets or personal liability. That said, many commercial property loans are non-recourse, meaning the borrower’s personal assets are not at risk should the loan go into arrears.

Types of Commercial Real Estate Loans

There are many types of commercial property loans. Each has unique upsides and downsides, and every investor should weigh all options available to make the best financing decision for their strategy.

Bank Loans

Bank loans are a traditional form of financing for commercial real estate. They are typically provided by commercial banks, credit unions, and other financial institutions. Bank loans are typically used for the purchase of an existing building, the construction of a new building, or the renovation of an existing building. 

Bank loans are typically secured by the property being purchased or renovated, and the interest rate and loan terms are based on the borrower’s creditworthiness and the type of property being financed. That said, given the number of banks and credit unions out there, many borrowers — even those with less-than-perfect credit — can find a bank loan that works for their situation if they know where to look.

SBA Loans

SBA loans are a type of financing that is backed by the U.S. Small Business Administration, or SBA. SBA financing is, at its core, a form of lending dedicated to small businesses and organizations. SBA loans are typically used to finance the acquisition or refinance commercial properties like office buildings, warehouses, industrial structures, retail assets, and many other types of owner-occupied commercial real estate. However, they cannot be used for multifamily properties. 

SBA loans are typically provided at variable interest rates for terms of up to 25 years, or shorter if real estate is not involved. Rates are tied to the WSJ Prime Rate, and the higher the loan amount, the lower the spread, typically.

CMBS Loans

CMBS loans are a type of financing that is provided by lenders who package and sell mortgages on to commercial mortgage-backed securities (CMBS) investors. These investors then receive the mortgage payments from borrowers. CMBS loans can be advantageous because they don’t require much scrutiny of a borrower. Rather, the loan is underwritten on the financial strength of the asset held as collateral. 

CMBS loans are generally provided with fixed interest rates and have terms of five to 10 years, with amortization periods of up to 30 years. Note that CMBS loans are available for most types of commercial real estate assets, but they may be harder to come by in smaller markets. This type of loan can be used to fund an acquisition or for a refinance.

Debt Fund Loans

Debt fund loans are a type of financing that is provided by private debt funds. Private debt funds are typically composed of a group of investors who provide financing to businesses and organizations in the form of loans.

Loans from debt funds generally cover financing scenarios that many other lenders, like banks, may shy away from. This could include lease-up financing for multifamily properties, or a loan to rehabilitate an office asset.

Hard Money Loans

Hard money loans can finance the purchase or renovation of a commercial property. This type of financing generally does not closely scrutinize the borrower as much as the asset involved.

These loans typically have shorter loan terms and higher interest rates than other types of loans. Additionally, hard money loans may require a larger down payment and come with significantly higher fees.

Qualifying for a Commercial Real Estate Loan

While there are few absolutes in commercial property finance, there are some elements that nearly every lender will examine prior to extending a loan.

Credit Score

Most lenders will, of course, look at your credit score. After all, this is a significant indicator of lending risk for any type of financing. While some types of financing, like CMBS loans, may place very little importance on a borrower’s credit score, most will still require it as a matter of course.

Loan-to-Value Ratio

When looking at a commercial property acquisition or refinance, a lender will typically limit the financing options on offer by a loan-to-value or loan-to-cost ratio. This is easily calculated — for example, if a property is valued at $1 million and a lender restricts its offer to a 70% LTV, you will be unable to get a loan larger than $700,000, for example.

Debt Service Coverage Ratio

Outside of assessing the property’s value, a lender will also examine the debt service coverage ratio, or DSCR, of any loan they extend. DSCR is a measure of a property’s cash flows relative to its debt service obligations. Essentially, using a DSCR calculation, a lender can determine if a property generates enough net income to cover its debt obligations. DSCR requirements vary by asset type, but the higher the better. Don’t expect to find many institutions willing to offer you a competitive loan at a DSCR of less than 1.25x.

Minimum Loan Amount

Many financing programs have built-in minimum amounts at which a lender won’t be willing to offer a loan. Every asset type is different, but typically loans are required to be at least $1 million. Exceptions do exist, especially in places like the multifamily sector, but it’s a good general rule of thumb. 

Collateral

You’ll of course need to provide collateral for a commercial property loan, but one area where many commercial loans differ from single-family residential financing is through non-recourse provisions. A non-recourse loan uses only the building as collateral. If you’re unable to cover your debt service costs, the lender can only repossess the property — your personal assets and income are not at risk. 

That said, for a first-time investor buying a smaller property, it’s far more likely your commercial real estate lender will offer you recourse loan options instead. This isn’t necessarily a bad thing, however, as recourse loans can have more competitive terms, as the lender is taking on less risk.

Commercial Mortgage Calculator

Know what loan terms you’ll be dealing with? Plug them into our commercial loan calculator below.

In Conclusion

The best financing option for your investment strategy will depend on your specific needs and financial situation. It is important to research all of the available options. Some may be a great fit, while others may not pencil out.

Understanding how to get a commercial real estate loan is the first part of your financing journey. Our team is standing by to assist you in finding the absolute best loan for your investment needs. Fill in the form below, and we’ll get back to you with a free quote.