Types of commercial real estate loans

So you want to purchase some commercial real estate? Well you should consider real estate to be set up like a buffet in some ways. 

There are a huge array of options in the real estate market and because of this, there are many types of commercial real estate loans available. But each is tailored to different investment strategies and business needs. 

Below are the 10 most common types.

1. SBA Loans

SBA loans are government-backed loans offered by the Small Business Administration. These loans are popular among small businesses because they offer lower down payments and longer repayment terms compared to traditional commercial loans. There are two main types: SBA 7(a) loans, which are versatile and can be used for purchasing real estate, and SBA 504 loans, which are specifically designed for purchasing fixed assets like real estate.

Example: A small business owner looking to purchase a new office space might consider an SBA 504 loan due to its favorable terms and low interest rates.

2. Conduit Loans

Conduit loans, also known as commercial mortgage-backed securities (CMBS) loans, are packaged together and sold as securities to investors. These loans offer competitive interest rates and are typically used for larger commercial projects. They are non-recourse loans, meaning the lender can only seize the property used as collateral if the borrower defaults, not other assets.

Example: A company planning to develop a large retail complex might opt for a conduit loan to secure the necessary funding at a lower interest rate.

3. Commercial Mortgages

Commercial mortgages are traditional loans provided by banks or other financial institutions. They are similar to residential mortgages but are used for commercial properties. The loan terms, interest rates, and down payment requirements vary based on the borrower’s creditworthiness and the property’s value.

Example: A business owner purchasing an existing warehouse may secure a commercial mortgage with a fixed or variable interest rate, depending on their financial stability.

4. Bridge Loans

Bridge loans are short-term loans used to “bridge the gap” between immediate financing needs and long-term financing solutions. These loans are typically used to cover the period before securing permanent financing or selling an existing property. Bridge loans usually have higher interest rates and shorter terms.

Example: A company needing quick funding to purchase a new property while waiting for the sale of another might use a bridge loan to cover the interim period.

5. Commercial Refinancing

Commercial refinancing involves replacing an existing loan with a new one, usually to take advantage of lower interest rates or better loan terms. This type of loan can help businesses reduce their monthly payments, free up cash flow, or consolidate debt.

Example: A business with a high-interest commercial mortgage may refinance to a lower rate, reducing their monthly payments and saving on interest over time.

6. Commercial Construction Loans

Commercial construction loans are specifically designed for financing the construction of new commercial properties. These loans are typically structured as short-term loans that cover the cost of building until the property is completed and can be converted to a mortgage. They often require a detailed construction plan and budget.

Example: A developer planning to build a new office building from the ground up would use a commercial construction loan to fund the project.

7. Hard Money Loans

Hard money loans are short-term loans secured by real estate. These loans are typically used by borrowers who need quick financing and may not qualify for traditional loans due to poor credit or other financial issues. Hard money loans have higher interest rates and shorter terms, making them more expensive but quicker to obtain.

Example: An investor needing immediate funds to purchase a distressed property for renovation might use a hard money loan to close the deal quickly.

8. Commercial Real Estate Blanket Loans

Blanket loans cover multiple properties under a single mortgage, making them ideal for businesses or investors who own several properties. This type of loan allows borrowers to consolidate their financing and potentially save on costs.

Example: A real estate investor with several rental properties might use a blanket loan to manage all properties under one loan, simplifying their payments.

9. Multifamily Loans

Multifamily loans are designed for purchasing or refinancing properties with multiple residential units, such as apartment buildings or condominium complexes. These loans are structured similarly to commercial mortgages but are tailored to the needs of residential rental properties.

Example: A business looking to acquire a 50-unit apartment building would seek a multifamily loan to finance the purchase.

10. Commercial Vacant Land Loans

Vacant land loans are used to purchase undeveloped land for commercial use. These loans are riskier for lenders, as the land doesn’t generate income, so they typically have higher interest rates and stricter requirements.

Example: A developer purchasing a plot of land to build a future retail center might secure a vacant land loan to acquire the property.