Commercial real estate loans

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Page written by Chris Godfrey. Last reviewed on August 23, 2024. Next review due October 1, 2025.

Instead of burning through your working capital, or putting strain on cash flow, use a commercial real estate loan to buy, build, refinance, or renovate commercial property.

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What are commercial real estate loans?

Commercial real estate (CRE) loans are business loans used for purchasing, constructing, renovating, or refinancing income-generating properties, this includes office buildings, retail units, medical centers, factories, warehouses, hotels, or vacant land for commercial development. CRE loans can also be used to buy land for residential construction and sale. Unlike residential mortgages, where the home is the primary asset used to calculate the loan, CRE loans are typically offered based on the income generated by the property (such as tenant rent and service charges), plus the market value of the real estate.

What are the different types of commercial real estate loans?

There are several types of commercial real estate loan, each with its own unique features and purposes:

Commercial mortgage: Can be used to acquire or renovate commercial property. These types of loan are often the cheapest way to borrow because a lender takes tangible security against their loan in the form of a lien over the property/properties being offered as security. These loans typically start at $50,000 and may go as high as $50million. Terms are typically 25 – 30 years.
Commercial bridge loan: Commercial bridge loans are short term business loans used to ‘bridge the gap’ between selling one property and buying another. This type of financing can also cover construction and renovation costs, help you to complete a project, or pay for business expenses while you wait for a long-term loan to fund.
Commercial construction loan: Commercial construction loans can be used to cover building or renovation costs, including land purchase, materials, and labor. These loans typically allow interest-only payments during the construction phase of a project, but costs can rise significantly once construction is complete.
SBA7(a) loan: Provided by banks, credit unions and online lenders who are part of the federal Small Business Administration (SBA) lender network. These loans can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Some SBA lenders may be willing to provide 100% loans to buyers of commercial property.
SBA 504 loan: Works as a hybrid mix of a Certified Development Company (CDC) loan (up to 40% of the total borrowed), plus a bank loan (up to 50%of the total borrowed). The collective maximum balance is $5.5 million, terms range from 10 to 25 years and down payment requirements can be as low as 10%.
CMBS or conduit loan: Part of a pool of commercial real estate loans (a commercial mortgage-backed security, or CMBS) sold on the secondary market by conduit lenders and investment banks. Terms usually span 5 to 10 years with an amortization of 30 years. 25% to 30% down payment is often needed.
Hard money loan: Similar to a commercial bridge loan but usually provided by a private lender.
USDA CRE loan: Supports the development and improvement of commercial properties in rural areas. Offered by approved lenders in partnership with the USDA. Terms can vary up to 30 years, often with a minimum down payment of 10%.

Why should I use a commercial real estate loan?

It rarely makes sense to buy commercial real estate with cash. Instead, most business owners, investors and real estate developers will use a mix of cash and a commercial real estate loan to buy the property they need. The benefits of this strategy are multiple – it reduces strain on cashflow, protects cash reserves, and may give the borrower the option of buying more property if they can meet lender credit requirements and demonstrate their ability to meet scheduled loan payments.

What credit score do I need for a commercial real estate loan?

A personal FICO score of at least 620 is typically needed to obtain a commercial real estate loan, although some lenders may offer financing below this score if the collateral property has a low LTV (loan-to-value). Note that the higher your credit score is, the lower the interest rate you will usually pay.

Do commercial real estate loans require collateral?

Most CRE loans will require borrower collateral to secure the deal. The benefit of providing security is that you will usually pay a lower interest rate than you may if the loan were unsecured.

How many years is a commercial real estate loan?

The term (duration) of commercial real estate loans varies according to the loan type. For example, standard commercial mortgages and SBA7(a) loans may be obtained with terms up to 30 years, but CRE construction loans usually have a maximum term of 3 years or less. The duration of most CRE loans is 5 to 20 years.

Where can I get a commercial real estate loan?

Commercial real estate loans can be obtained by approaching banks, credit unions and online lenders one by one, or you could use the services of a loan marketplace that will immediately introduce you to a choice of CRE loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a commercial real estate loan before.

What you’ll need to get a commercial real estate loan:

Down payment – virtually all CRE loans require at least a small down payment. Ensure you have 10% to 30% of the total purchase amount to hand before going to a lender.
Good DSCR – debt service coverage ratio, (DSCR), is a formula lenders use to determine the ratio of your available cash to your monthly debt obligations. Most lenders have a specific benchmark they are looking for. Ask them what that is before you apply.
Property appraisal – most lenders will request an appraisal of the property to be financed. This will usually need to be no more than one year old.

Who are commercial real estate loans for?

Commercial real estate loans are offered to business entities such as corporations, developers, limited partnerships, funds, and trusts. Some of these businesses may be formed specifically to own commercial properties. Where these entities lack a financial track record or credit rating, lenders will typically require loan guarantees or collateral from the principals or owners.

What is the interest rate on a commercial real estate loan?

Interest rates on commercial real estate loans vary according to the type of loan, type of property or project, the financial strength of the borrower, the value of the collateral, the proposed term of the loan and the sum requested.

What is the minimum down payment for a commercial real estate loan?

Although it may be possible to secure a CRE loan with 100% financing, most lenders will require at least a 10% down payment. Expect to provide a 10% to 30% deposit depending on the type of loan, the value of the real estate to be financed and your financial situation.

How to apply for a commercial loan

Carefully assess the financials of the commercial property

Lenders will scrutinize both your personal credit history and the financial details of the real estate. If you’re buying as an investment, the potential net income and the longer-term appreciation of the property must present a profitable result

Determine the type of commercial loan you need and compare options

Borrowers often source lenders directly by approaching individual banks one by one, but it is typically faster to work with a loan marketplace that has multiple CRE lenders in their network

Complete your loan application

You’ll need to provide documentation, including personal and business tax returns, a personal financial statement, business and personal balance sheets, and historical income and expense reports for the property. This may also include the property seller’s Schedule E from their federal tax return, or a financial statement prepared by the seller. Be prepared to furnish a current listing of each tenant, the space they occupy, tenancy commencement dates, lease details, and lease agreements.

Await loan processing and underwriting

The lender will use the information you provide to verify the property’s ability to repay the debt. Lenders typically look for a debt service coverage ratio of 1.2 to 1, meaning there should be $1.20 in positive cash flow for every $1 of annual mortgage debt

Close the loan

Be patient. Closing a commercial loan often takes longer than a residential mortgage because lenders view commercial property loans as riskier, which means their due diligence is more thorough and slower to process.

What are the alternatives to a commercial real estate loan?

There may be other ways to fund your commercial real estate purchase. Here are a few alternatives to a standard CRE loan:

Commercial equity line of credit (CELOC)

A CELOC (commercial equity line of credit) is a revolving line of credit secured by commercial property. It functions like a high-value credit card, enabling borrowers to access funds when they want as much as they want, up to the limit of the credit line. Use the equity you have in one commercial property to obtain a loan to buy another or to expand or renovate your existing premises.

Term loan

Term loans are the most common type of business loan., You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years.

Small business grant

Small business grants are available from government agencies (federal, state and local), foundations, charities, non-profits and corporations, and there are literally thousands to choose from in the US. Although business grants are highly competitive and you will need to meet strict qualifying rules, grant awards are effectively free money as you do not need to pay the cash back. Some business grants may allow you to invest the funds in commercial real estate, especially if the investment serves a public good – such as opening a care center or upgrading a manufacturing facility to improve the local environment

Business credit card

If you’re seeking funds for a modest CRE construction or renovation project, you may be able to cover the expense with a business credit card. These types of cards usually have higher credit limits than personal card accounts and may be available without providing collateral.

How Swoop can help

For a commercial real estate loan or any type of business loan, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality CRE loans and business loans from a choice of lenders. Make your mark in commercial real estate. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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