Types Of Commercial Real Estate Loans: A General Guide

You may need commercial real estate loans for development, investment, or businesses. However, in-depth research may be required to determine which commercial real estate loan type will fulfill your needs. Navigating these loans can be complex, as multiple types are available, each with distinct terms, requirements, and best-use scenarios. That is why Cornovus Capital has brought this guide, where we’ll discuss the different types of commercial real estate loans, which will be perfect for whether you wish to purchase, renovate, or expand a property.    

Explanation For Types Of Commercial Real Estate Loans

When financing your commercial real estate investment, check out the following types and see if they are apt for your needs: 

Traditional Commercial Mortgage For Commercial Real Estate 

Traditional commercial mortgages are permanent loans with some amortization and a term of a minimum of 5 years in the contract. With fixed terms (typically 5-20 years) and often fixed interest rates, term loans provide stability in budgeting for businesses. The loan-to-value ratio can go up to 80%. For the banks with interest-only loans for a term of 10 years, the loan-to-value ratio will be 65%.  

Additionally, term loans often require a down payment of 15-25%, depending on the lender's terms. Their predictability and lower interest rates make them an attractive option for stable businesses looking to own property. 

Suitability
Best for companies with strong financials  Solid business track record  A high debt-service coverage ratio  Steady cash flow
Pros	Cons
Long-term plan  Lower interest rates  Stable payments divided into months	Limited flexibility  Possibility of high closing costs

 

Bridge Loans: Flexible Short-Term Financing 

Bridge loans are for short-term and “bridge” the gap between the immediate need for financing and a more permanent loan solution. They can provide rapid funding that allows the borrower to acquire or renovate a property before obtaining long-term financing. However, bridge loans come with greater interest rates and shorter repayment periods (generally 6 months to 3 years) than other commercial real estate loans. 

These loans work well for companies that need to close quickly on a property or require temporary financing to complete property improvements that make the property eligible for better, more permanent financing options. Businesses should weigh the benefits of fast funding against the higher costs and potential for balloon payments at the loan’s end. 

Suitability
Businesses needing quick capital  Perfect for bridging till a long-term solution is found  Temporary financing needs sorted
Pros	Cons
Quick availability of funds  A bit of flexibility in borrowing  Potential for refinancing	Higher interest rates  Shorter payment periods

 

SBA Loans: Government-Backed Options For Small Businesses 

SBA loans, provided through the U.S. Small Business Administration, are government-backed loans for small business proprietors looking to purchase or refinance commercial real estate.    

Two main types of SBA loans are used for commercial real estate: the SBA 7(a) and SBA 504 loans. The SBA 7(a) loan program is more versatile, allowing business owners to use the loan for real estate, equipment, or working capital. The SBA 504 loan program is similar except the SBA doesn’t specify a maximum loan amount. 

These loans are a part of commercial construction loans that operate on a draw system where funds are released in stages depending on when the construction milestones are met. This ensures the funds are used for specific phases of the project, from land acquisition and labor to building materials. 

Suitability
Affordable option for small business owners  Good credit and specific level of revenue are a pre-requisite
Pros	Cons
Competitive rates  Low fees  Longer terms  Greater loan amounts	Qualification limits  Extensive documentation and slower processing  Collateral might be needed

 

Conduit Loans: Ideal For Investment Properties 

Conduit loans, also known as CMBS (Commercial Mortgage-Backed Securities) loans, are typically used by businesses seeking to acquire income-generating properties like office buildings, apartment complexes, or retail centers. These loans are bundled together with other similar loans, converted into securities, and sold on the secondary market.  

However, conduit loans also come with stricter repayment terms and penalties for early repayment. The loan terms are typically 5 to 10 years, with amortization periods of 25-30 years. Conduit loans can be advantageous for investors who plan to hold the property long-term, but they require careful planning due to their lack of flexibility. 

Suitability
Stable properties requiring long-term financing
Pros	Cons
Lower interest rates  Flexibility in underwriting guidelines	High legal fees  Loans can go into technical default  Changes to the property might be difficult  Penalties for early payments  There may be difficulty working with special servicers

 

Hard Money Loans for Quick, Asset-Based Funding 

Hard money loans are a type of short-term loan offered by private lenders and based primarily on the value of the property used as collateral. Unlike traditional loans, hard money loans rely less on the borrower’s creditworthiness and more on the asset itself.  

These commercial land loans can be beneficial for businesses needing quick capital to secure or rehabilitate a property but may come with high interest rates and shorter terms, typically between 6 months to 3 years. 

Due to their high costs, hard money loans are usually considered a last resort for borrowers who may not qualify for other loans due to credit issues or other financial challenges. While they can offer immediate access to funds, businesses should use hard money loans cautiously and ensure they have a clear exit strategy for repayment. 

Suitability
Funding is needed for a short term  You have a transparent exit strategy  The numbers favor you
Pros	Cons
Quick approvals based on property, not credit history  Flexible loan terms  Less strict underwriting  Quick fix and flip of properties	Low loan-to-value ratios  High interest rates  Risk to lenders

 

Bottom Line

Whether you’re expanding an existing business, developing new property, or investing in income-generating assets, commercial real estate loans provide a pathway to growth in the business world. Each loan type serves different purposes and is suited to distinct business needs. By understanding the options and carefully evaluating each type, businesses can make informed decisions, choosing the financing option that aligns best with their strategic goals and financial capabilities. 

If you’re looking for a Commercial Real Estate Loan in the US, get in touch with the advisory team at Cornovus Capital. We will guide you and connect you with our nationwide network of lenders with favorable terms.  

 

FAQs 

 

1. What is the difference between CRE and C&I loans? 

Commercial Real Estate (CRE) loans finance property for business use or investment, while Commercial and Industrial (C&I) loans fund business operations, equipment, or inventory, rather than property. CRE loans involve property collateral; C&I loans do not. 

2. What is meant by a commercial real estate loan? 

A commercial real estate loan is a solution to finance purchasing, refinancing, or developing properties intended for business use, such as office spaces, warehouses, retail centers, and multifamily housing, with repayment terms suited for businesses and investments. 

3. How to choose the best commercial real estate loan? 

Choosing the right loan involves assessing property type, loan terms, interest rates, and your business’s financial profile. Researching SBA loans, bridge loans, and conduit loans, for example, helps align financing with specific project needs and financial goals.