Types of Commercial Real Estate Loans

Commercial property owners often need mortgages when they want to build buildings. Once buildings are built, they sometimes need additional financing to keep them fully leased and in good condition.

Commercial real estate loans are one of many types of commercial loans.

What is a commercial real estate loan?

A commercial real estate loan is a secured mortgage on commercial property, rather than residential property.

They can be offered by banks, private lenders, insurance companies, pension funds, and even the U.S. Small Business Administration. Commercial real estate loans can create business partnerships, allow businesses to expand, and help homeowners to avoid foreclosure. They are offered by a variety of banks and lenders willing to take the risks inherent in commercial real estate development.

The incentive for lenders to make loans to commercial real estate owners is that their properties typically attract wealthy tenants and sometimes produce millions of dollars in income. Although the risk is high, the incentives to make money can be even greater.

Types of Commercial Real Estate Loans

Understanding the different loan options and how they work can help real estate professionals and commercial building owners, as well as lenders, better navigate financing opportunities in times of need.

bridge loans

A bridge loan gives the borrower instant cash flow to finance the immediate needs of a project. Bridge loans are temporary, usually with a term of about a year. They are usually obtained while the borrower waits for long-term financing to arrive.

Private lenders often offer bridging loans. Require excellent credit scores and proof of income. Borrowers must also show that they have enough cash to cover the existing expenses of the property plus the repayment of the new loan.

Loans for real estate purchase

Real estate loans are similar to fixed-rate and adjustable-rate commercial mortgages. Borrowers must have excellent credit to qualify for this type of loan and significant savings in both business and personal bank accounts.

Lenders generally require that business property be used as collateral. The interest rate on loans is determined by the loan-to-value ratio.

hard money loans

The owner must include the business property as collateral to qualify for a hard money loan, even if the loan is used to save the property. Private lenders typically offer hard money loans that don’t have to meet the same standards as conventional commercial lenders.

These loans are temporary, not long-term, and are only offered when time is of the essence, such as during a foreclosure proceeding. They carry a high risk of default and a correspondingly high interest rate.

Joint Venture Financing

Private investors and investment firms often offer loans for joint ventures. Typically, two partners in a group apply for funding together. A joint venture loan is useful when neither party in a partnership can raise financing on its own. You can create an agreement in which all parties share equally in the gains and losses of a property.

Unlike a true real estate company, the relationship between the loan applicants does not have to be formal or extend beyond the financed property and the loan.

Participating mortgage

Under a participating mortgage, the lender can share part of the income generated by a commercial property. The lender receives your monthly mortgage payment along with interest, as well as a share of the property’s rental income or sales proceeds.

Participating mortgages are popular with office and commercial properties where well-known, financially stable tenants have signed long-term leases.

key takeaways

SHORT-TERM CREDIT: A short-term loan that gives a loan instant cash flow to upgrade or maintain commercial real estate.

LOAN FOR THE PURCHASE OF REAL ESTATE: A form of mortgage for the purchase of commercial property in which the property is used as collateral.

HARD MONEY LOAN: Temporary loans with high interest rates used to save a property, such as one facing foreclosure

JOINT VENTURE FINANCING: Loan made to a partnership in which both partners share the risks, rewards, and profits of business ownership

PARTICIPATING MORTGAGE: An agreement in which the lender receives a portion of the profits from the commercial property, as well as the interest on the loan.

Choosing the Right Commercial Real Estate Loan

The right type of loan will depend on your financial history, the type of real estate you own, your goals for that property, and what you intend to use the loan for.

To find the right loan for your needs on terms you can afford, you may need to talk to multiple lenders. If you’re a small business, you may want to seek financing through the Small Business Administration and its partners, which may offer better loan terms than many banks or private lenders.

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