Commercial real estate lending enables businesses to purchase real estate utilized for business purposes by offering mortgage loans or other forms of finance. Office buildings, retail sales structures (such as shopping centers and malls), warehouses and other sites for light industrial manufacturing, self-storage facilities, hospitals, and other medical facilities, restaurants, recreation areas, and land are examples of commercial real estate.
The Significance Of Loans For Commercial Real Estate
For a few key reasons, commercial real estate loans are a vital component of the economy.
First, almost all firms depend on them for capital to function.
Second, because they are often much more significant than residential real estate loans, commercial real estate loans generate a sizable amount of cash for the commercial banks and other lenders that offer them.
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Types Of Loans For Commercial Real Estate
Although hundreds of different financing arrangements may be employed in commercial real estate lending, there are several primary forms of commercial loans for real estate transactions.
1. Ordinary Commercial Real Estate Loans
The typical commercial real estate loan is very similar to home mortgage financing. “Permanent” loans are another name for commercial loans. Identical to standard residential mortgage loans, the collateral for the loan is typically the property being acquired. However, businesses can also use other types of collateral to secure a commercial real estate loan. This includes inventory, equipment, assets they already own, or even a specific deposit account.
2. Seller-Financed loans
A company wishing to purchase a commercial property might be able to get financing straight from the seller, just like with residential mortgage loans. Seller-provided financing is typically favored over traditional commercial bank financing since payment terms are frequently more lenient. Additionally, the buyer can be eligible for a cheaper loan rate.
Selling-financed loans are more typical when a business buys a property from an individual rather than another company or when it wants to buy an income-producing property like an apartment building.
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3. Bridge Loans
Bridge loans are short-term commercial real estate loans. A bridge loan typically lasts between six months and two years. Bridge loans are frequently used for two reasons: either the buyer plans to sell the property during the bridge loan’s term, or they expect to dramatically raise their credit score during that time.
Commercial developers who, for instance, anticipate finishing the construction of an office building on purchased land that they will later sell to another party typically employ bridge loans. They are also used by real estate investors who buy houses and “flip” them quickly.
4. Small Business Administration (Sba) Loans
An SBA loan is available to small firms in the US, and they can benefit from several benefits. The borrower often receives a significantly lower interest rate when the SBA guarantees at least a portion of a commercial real estate loan. This is because the lender is exposed to substantially less risk.
Additionally, SBA loan funds can be utilized for working capital, debt restructuring, purchasing machinery, stock acquisitions, and other things in addition to buying real estate. The SBA 7(a) lending program is the SBA loan program that gives borrowers the most freedom. SBA 504 is the second largest SBA loan program.
5. Hard Money Loans
Private lenders or investors provide hard money commercial loans. Companies with poor credit—those who could have trouble getting a loan from a commercial bank, credit union, or other traditional lenders—or those with financial difficulties are frequently provided with hard money loans. The asset’s value used to secure the loans is a strict guarantee.
Most hard money loans have concise terms, usually less than a year. They resemble bridge loans in that regard. For instance, you could obtain a hard money loan to assist a business with cash flow or debt servicing issues. This is done by taking out a loan secured by the business’s real estate.
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6. Blanket Loans
Businesses can combine numerous properties into one financing plan under a commercial real estate blanket loan for ease and flexibility. For instance, if you have a blanket loan on ten properties and decide to sell two, you can do so without paying any penalties. You can also use the proceeds to make more investments.
Although there is less paperwork and more investment options, blanket loans have disadvantages. They are complex mortgages that are challenging to obtain, have high payments, and have much higher possible default penalties.
7. Construction Loans
Construction loans are obtained to pay for the material and labor costs of constructing buildings such as offices, storefronts for retail establishments, warehouses, multi-family rental properties, and more. Construction loans typically result in a long-term mortgage of between 18 and 36 months. Undeveloped land can be used as collateral for a construction loan if it has already been purchased (as can the building materials).
Additional Sources Of Commercial Real Estate Financing
In addition to life insurance companies and crowdfunding, other possible commercial real estate financing sources are life insurance companies. In addition, commercial banks, credit unions, the SBA, individual investors, and private firms function as hard money lenders.
# Insurance Companies
In contrast to “risk-free” assets like Treasury bonds, life insurance companies seek dependable, low-risk investments that provide higher returns. Making commercial real estate loans to reputable, financially stable development enterprises is one investment strategy they frequently follow. A Different Pool of Commercial Real Estate Lenders
# Crowdfunding
Lending for commercial or medical real estate is increasingly coming via crowdfunding, also known as online peer-to-peer investing. Websites like sharestates.com link institutional and private investors with businesses looking to raise money for real estate development.
Investors can identify their specific areas of interest geographically and in terms of project types. The popularity of crowdfunded real estate investment trusts (REITs) is also rising.
Conclusion
There is financing available for each type of business real estate endeavor you want to get into. There are now more flexible options and outlets to obtain finance than ever, thanks to the growth of internet lenders and marketplaces. The fact that owner-occupied commercial real estate is effectively its security makes commercial real estate loans, which are a logical place for a small-company owner to start, generally have lower interest rates than other business loans.
