Understanding Commercial Real Estate Financing | Guide By Cornovus Capital

If you have commercial real estate, you can keep it as a mortgage and get funds for your needs. This phenomenon is called commercial real estate financing, and the funds you get are called commercial real estate loans. These loans are quite popular among business owners and investors for purchasing, developing, and improving properties for commercial use. Unlike residential real estate, commercial real estate covers various properties, including office buildings, shopping centers, industrial properties, and multifamily housing units. This article by Cornovus Capital will delve into the types and terms of commercial real estate loans, exploring the different options available, key terms, and what investors need to know to secure the right financing. 

What Is Commercial Real Estate Financing? 

Commercial real estate financing involves obtaining capital to purchase, refinance, or improve properties used for business purposes. These loans are typically secured by liens on the commercial property, ensuring that lenders can claim the property if the borrower defaults. 

Key Differences Between Commercial And Residential Loans 

While both commercial and residential loans involve real estate, they differ significantly in their terms, eligibility requirements, and purposes: 

Purpose:  

Residential loans are for purchasing or refinancing homes, whereas Commercial Real Estate Loans are for properties used for business purposes. 

Terms And Conditions: 

Commercial loans often have shorter terms, higher interest rates, and more stringent credit requirements compared to residential loans. 

Down Payments: 

Higher down payments are usually required for commercial real estate, often between 20-30%. 

Underwriting Process:  

The underwriting process for commercial loans is more complex, often requiring detailed business plans and financial statements. 

Types Of Commercial Real Estate Loans

Here, take a look at the various types of commercial real estate loans: 

Traditional Commercial Mortgages 

These mortgages are similar to residential mortgages but are specifically designed for commercial properties. They typically have a fixed interest rate and a term of 5 to 20 years, with amortization periods that can extend up to 30 years. 

Pros: Predictable payments, longer terms 

Cons: Higher down payment, stringent approval process 

SBA Loans 

The Small Business Administration (SBA) offers loans specifically for small businesses looking to purchase or improve commercial property. The two significant types of SBA loans are the 7(a) Loan Program and the other one is 504 Loan Program. 

Pros: Lower down payments, longer repayment terms 

Cons: Lengthy application process, additional fees 

Bridge Loans 

These are short-term loans that provide immediate capital for commercial real estate projects until permanent financing is secured. Bridge loans charge higher interest rates and shorter terms, ranging from six months to three years. 

Pros: Quick access to capital, flexible terms 

Cons: Higher interest rates, short repayment period 

Hard Money Loans 

Hard money loans are those that are secured by the property itself and are called asset-based loans. Those investors who need quick financing and can pay higher interest rates for quicker approval use these loans. 

Pros: Fast approval, less stringent credit requirements 

Cons: High interest rates, short terms 

Key Terms In Commercial Real Estate Financing 

Understanding the terminology associated with loans on commercial real estate is crucial for navigating the financing process: 

Loan-To-Value (LTV) Ratio 

This ratio measures the loan amount relative to the value of the property. A lower LTV ratio indicates less risk for the lender because the borrower has more equity in the property. 

Debt Service Coverage Ratio (DSCR) 

The DSCR is a key metric lenders use to assess the property's ability to generate enough income to cover the loan payments. A DSCR that is higher than 1 indicates that the property produces enough income to cover its debt obligations. 

Amortization 

Amortization refers to the process of spreading out loan payments over time. In commercial real estate, loans may have amortization periods longer than the loan term, resulting in a balloon payment at the end. 

Interest Rates 

Interest rates that are imposed on commercial real estate loans can either be variable or fixed. Fixed rates are the same throughout the loan period. Variable rates can fluctuate with the market conditions. 

Prepayment Penalties 

Some commercial loans include prepayment penalties. It is fees charged for paying off the loan before the end of its term. These penalties compensate the lender for the loss of interest income. 

Steps to Get A Commercial Real Estate Loan

Prepare Financial Documents: Gather all necessary financial documents, including business financial statements, tax returns, and personal financial statements. 

Craft a Business Plan: Create a detailed business plan that has the purpose of the loan, projected income, and how the property will be used. 

Research Lenders: Look for lenders specializing in financing of commercial real estate, such as banks, credit unions, and private lenders. 

Submit Applications: Apply to multiple lenders to compare terms and interest rates. 

Negotiate Terms: Once approved, negotiate the loan terms to meet your financial goals.   

Factors Affecting Loan Approval

Several factors can impact your ability to secure a commercial real estate loan: 

Creditworthiness: Both personal and business credit scores play a significant role in loan approval. 

Income and Cash Flow: Lenders will assess the income and cash flow of the business to ensure it can cover the loan payments. 

Property Value: The value of the property and its potential to generate income are critical considerations for lenders. 

Down Payment: If your down payment is higher, it can improve your chances of loan approval as it reduces the lender's risk.   

 

Bottom Line

Understanding the numerous types and terms of Commercial Real Estate Loans is essential for anyone looking to invest in or develop commercial properties. Whether you're a seasoned investor or a business owner seeking to expand, knowing your options and how to navigate the financing process can help you secure the necessary capital for commercial real estate ventures. With the right financing, you can take advantage of opportunities in the commercial and residential loans markets, ensuring your projects are well-funded and poised for success. 

To get yourself commercial real estate loans, you can contact Cornovus Capital. As an intermediary advisory firm, we link you with a diverse network of lenders. Our contact details are as follows: 

Email	[email protected]
Phone	+1 (513) 653-4246

 

FAQ’s

 

1. How Can I Connect To Lenders For Favorable Commercial Real Estate Loans In US? 

If you’re in US and looking to connect with a diverse network of lenders for favorable commercial real estate loans, choose Cornovus Capital. We are an intermediary advisory firm and can link you with nationwide lenders.  

2. Do Banks Provide Commercial Loans? 

Yes, banks in the US can offer commercial loans. You must consult them and check out their terms and conditions.