Commercial property loans are not made equal. The finance that suits a retail building could be completely wrong for a construction and investment deal, while an investor looking for long-term rental income may have issues with a short-term loan. Learning about types of commercial real estate loans can save you from some costly financing errors.
The Four Questions You Ask to Determine Your Loan Choice
Answer these four fundamental questions before you start comparing lenders:
- What are you financing? Are you looking to land, acquire a property already built, remodel a building, or refinance upon debt?
- What will the property do to generate income? The influence of lender requirements might arise from rental income, business operations, resale value, or a future development project.
- When will you need the money? A property you expect to own for 15 years structuring will be different from one that is likely going to be sold in the next 18 months.
- How much risk can you manage? Think about the impact of interest rate fluctuation, vacancy time in between, construction delay, or one big final payment.
Follow the Money
When You are Purchasing an Existing Property
You might consider a standard business loan when buying an office, warehouse, retail center, or other existing property. That is, a lender will usually consider the finances of the borrower, the property value, and the income generating capacity of it.
You will also want to see if an SBA-backed loan might make sense for a business buying the property it wants to occupy, provided you meet program requirements.
When You are Improving Your Property
With renovation financing, you can fund your upgrades, repairs, expansions, or modernization. A commercial mortgage, construction loan, or a combination of acquisition and improvement costs depending on what deal the borrower is trying to finance.
The lender is typically going to want an itemized budget, contractors’ estimates, and a reasonable timeline for completion.
When You Need Speed
Bridge loans offer short-term financing solutions when timing is key. They can help an investor to close quickly, acquire a property before permanent financing is available or make improvements before refinancing.
However, these loans typically come with shorter terms and higher expenses. You need to be solid with an exit plan.
When You are Starting from the Ground Up
Funds are released at certain times in a construction loan when work has reached agreed milestones. The developer’s track record along with the project plan, budget estimates, and permits may determine its approval, or otherwise, the property value.
Considering that delays can be costly, it is important for borrowers to factor in a reasonable contingency reserve.
Go through the Terms Behind the Range
The rate is just one factor when making the decision. Examine the loan-to-value ratio, cash flow term, and amortization schedule, outstanding balloon sum due on an as-needed basis or lump payment, closing costs and fees like title insurance, origination charges, prepayment penalties; and personal guarantee.
Even if the lower rate would seem more appealing, it may not be advisable that options with restrictions or a substantial payout at maturity are included.
Build Around Your Exit Plan
The most effective way to finance this decision is to incorporate it into a larger property strategy. Consider the types of commercial real estate loans you can qualify for depending on your timeline, income expectations, and perceived risk − not simply based on how much money you can borrow. A qualified commercial lender can assist in assessing the structure prior to signing.
