Top 5 Things to Know About Commercial Real Estate Loans
Purchasing or renovating a commercial property is an exciting time for your business. Whether it’s your first time entering commercial real estate or you are a seasoned professional, obtaining a loan for a large project the process can still be stressful. To put you at ease, here is a list of the top 10 things you should know about commercial real estate loans to help you choose the one that’s best for your business.
Interest rates tend to be steeper in commercial real estate vs. residential loans
Do not be alarmed if your commercial real estate loan’s interest rate is quoted much higher than the interest rate on your residential loan—these are two very different types of loans. Real estate loans are used only for business purposes, and it’s important to differentiate that businesses take out commercial real estate loans, not individuals. Commercial real estate projects are often quite costly and therefore have steeper interest rates due to the risk involved.
Similar to small business loans, your commercial real estate interest rate will be calculated depending on three key factors: the type of business you have, its financial health and your creditworthiness.
With any project, you want a seasoned team that have experience in navigating those risks and minimizing those risks every step of the way.
Unlike residential mortgage loans that are fixed over 30 years give or take, commercial real estate loans come in two forms, typically over a shorter amount of time. Intermediate term loans are fixed for three years or less and long-term loans last from five-20 years.
It’s important to have a project timeline and a property development team that can accurately project those timelines. Your money depends on it.
Closely Consider Balloon Loan
One very important note is that a commercial real estate loan might come as an amortized loan or as a balloon loan. As many are familiar with, amortized loans are repaid in fixed installments until you’ve fully paid the lender back, plus interest. However, a balloon loan is classified by smaller payments made over the term—typically 5-7 years—with one large lump sum to cover the remaining cost of the loan at the end. Although lenders typically offer more favorable rates and LTV terms with balloon loans, you should only consider this option if you know you’ll have extra capital at the end of the term, otherwise your final payment can be extremely steep, potentially causing you to refinance the loan.
Where to get a commercial real estate loan
As mentioned above, the type of lender you sign with will determine what down payment, interest rate and the LTV of your loan. For commercial real estate loans, you have several options: Commercial banks, credit unions, commercial mortgage-backed security (CMBS) lenders, life insurers, and the Small Business Administration can all help you secure a commercial real estate loan.
Spruce up your business plan
Because commercial real estate loans are typically considered more risky, the application process is quite detailed. Have your financials in order, as well as a clear and detailed business plan. Lenders will read your plan carefully and scrutinize your business goals and objectives on how this new property will help your business thrive, so be sure to include the value proposition and how this new commercial property is vital to your success.
The 9YARDS Difference
The 9YARDS one-of-a-kind studio operation exposes clients to the diverse aspects of property development, the loan process being a vital piece of that process. 9YARDS clients are privy to the decades of experience and vast professional network to help secure the right loan, truly providing an experienced advocate every step of the way.