How Does a Commercial Real Estate Loan Work?

Press release content from Newswire. The AP news staff was not involved in its creation.

https://apnews.com/press-release/newswire/lifestyle-business-25896901d7f4214b07f3f749537f208e

Click to copy

NEW YORK – September 23, 2021 – ( Newswire.com )

iQuanti: Commercial real estate loans are designed to help business owners purchase income-producing properties, such as retail stores or office buildings. Just like home buyers can use residential loans to finance new homes, business owners can use commercial real estate lending to get a mortgage for their next property.

Still, navigating the ins and outs of commercial real estate loans can be tricky. It’s important to understand the different types of loans available, terms of each loan agreement, and application criteria.

What is a commercial real estate loan?

A commercial real estate loan is a loan provided by a lender to a business or business owner for the purpose of purchasing or renovating a commercial property.

Examples of these commercial properties include:

  • Shopping centers
  • Restaurants
  • Office buildings
  • Apartment buildings
  • Warehouses
  • Hotels
  • While residential loans are often granted to individuals, such as prospective homeowners, commercial real estate loans are commonly given to businesses, such as corporations, partnerships, and trusts.

    Types of commercial real estate lenders also vary. Common lenders include commercial banks, credit unions, and private companies. The U.S. Small Business Administration (SBA) also offers two types of SBA loans for businesses.

    What are the terms of commercial real estate loans?

    Many different factors go into creating commercial real estate loans. These terms are decided based upon the unique needs of the lender and the borrower.

    READ  Real estate spotlight: Community Within the Corridor developers think big to create deeper community impact

    Repayment schedule

    Repayment schedules for commercial real estate loans commonly range from five to 20 years.

    The amortization period, however, is typically longer than the repayment period. A borrower might have 10 years to repay the loan, for example, but the amortization schedule is 30 years. So at the end of those 10 years, they make one last balloon payment to cover their remaining balance.

    Prepayment penalties

    Many commercial real estate loans come with prepayment penalties or fees, discouraging borrowers from paying off their loans early.

    The main types of these penalties include:

  • Basic prepayment penalty — a fixed percentage, set by the lender, multiplied by the current outstanding balance
  • Interest guarantee — an interest rate the borrower must continue to pay even after repaying the loan in full
  • Lockout — a specified time period during which the borrower can’t pay off the loan
  • Loan-to-value ratio

    The loan-to-value (LTV) ratio is the amount of the loan divided by the property’s value. This helps lenders determine how much money they can realistically loan to a borrower.

    LTVs for commercial real estate loans commonly fall in the range of 65-80%. That means commercial real estate buyers may need to put 20-30% down on their property before applying for a loan.

    Debt-service coverage ratio

    The debt-service coverage ratio (DSCR) is the property’s annual net operating income divided by its annual mortgage debt payments. This helps lenders calculate their loan based on how much revenue the commercial property is expected to generate.

    READ  Small Business Focus: A ReLaunch Success Story

    The median DSCR is 1.25, according to the National Association of Retailers. A DSCR of less than 1 tells lenders that the business won’t have enough cash flow to cover their annual debt.

    Interest rates and fees

    Interest rates for commercial real estate loans average in the range of 5-7%. However, these rates depend on many factors. For example, borrowers with lower LTVs may qualify for lower interest rates, since their loans pose less risk for the lender.

    Commercial real estate may also come with a range of fees to be paid during closing, such as:

  • Appraisal fees
  • Legal fees
  • Application fees
  • Survey fees
  • Origination fees
  • How can you apply for a commercial real estate loan?

    A commercial real estate lender will commonly take a few different criteria into account when deciding whether to provide a loan. These factors include:

  • Collateral. The commercial property itself will often be used as collateral.
  • Business credit. This includes a business’ credit score, debts, and payment history.
  • Personal credit. If a business hasn’t been operating long enough to have a credit history, the lender may consult the business owner’s personal credit history.
  • It’s important for business owners to understand these loan terms and criteria while shopping for a commercial real estate lender and preparing to make their next big financial investment.

    Press Release Service by Newswire.com

    Original Source: How Does a Commercial Real Estate Loan Work?

    Leave a Reply

    Your email address will not be published. Required fields are marked *