Commercial Real Estate Loans: The 8 Best Options
1. Conventional Bank Loans
Looking for a commercial real estate loan? Conventional bank loans are a popular choice, offering competitive rates and terms. Banks typically require a strong credit score, solid financials, and a down payment of 20-30%. The application process can be lengthy, with extensive documentation required. But, for qualified borrowers, bank loans provide attractive long-term financing.Key benefits include:
- Low interest rates
- Fixed-rate options
- Long repayment terms
However, keep in mind:
-- Strict qualification criteria
- Lengthy application process
- Significant down payment required
If you have a strong financial profile and aren’t in a rush, a conventional bank loan could be your best bet for affordable, long-term commercial real estate financing. Shop around and compare offers from multiple banks to secure the most favorable terms for your business.
2. SBA 7(a) and 504 Loans
Need financing for owner-occupied commercial real estate? Consider an SBA loan. The SBA 7(a) and 504 programs offer government-backed financing with low down payments and competitive rates. The 7(a) program provides loans up to $5 million for a variety of business purposes, including real estate. The 504 program is specifically for fixed assets like real estate, with loans up to $5.5 million.SBA loans offer:
- Low down payments (10-15%)
- Below-market interest rates
- Long repayment terms (up to 25 years)
But there are some drawbacks:
- Lengthy application process
- Extensive documentation required
- Strict eligibility criteria
If you plan to occupy at least 51% of the property, an SBA loan could provide affordable, long-term financing. Work with an experienced SBA lender to navigate the application process and secure the best terms for your business.
-3. Commercial Bridge Loans
Need short-term financing to bridge the gap until you secure permanent financing or sell a property? A commercial bridge loan could be the answer. These loans provide quick access to capital, with terms of 6-24 months. Rates are higher than traditional loans, but the streamlined application process and flexible terms make bridge loans a good fit for certain situations.Bridge loans offer:
- Quick funding (as fast as 1-2 weeks)
- Flexible underwriting criteria
- Interest-only payment options
But watch out for:
- High interest rates
- Short repayment terms
- Balloon payments
If you need fast funding and can handle the higher costs, a bridge loan could provide the temporary financing you need. Look for lenders specializing in bridge loans and compare offers to find the best deal.
4. CMBS Loans
Looking for long-term, non-recourse financing for a stabilized commercial property? A CMBS (commercial mortgage-backed securities) loan could fit the bill. These loans are pooled and sold to investors on the secondary market, offering competitive rates and terms. CMBS loans are a good option for larger loans ($2M+) on stabilized properties.Benefits of CMBS loans include:
- Non-recourse (no personal guarantee)
- Competitive interest rates
- Long repayment terms (5-10 years)
Drawbacks to consider:
-- Prepayment penalties
- Inflexible loan terms
- Extensive due diligence required
If you have a stabilized property and want long-term, non-recourse financing, a CMBS loan is worth considering. Work with an experienced CMBS lender to navigate the complex underwriting process and secure favorable terms.
5. Life Company Loans
Need long-term financing for a high-quality commercial property? Consider a life company loan. These loans are funded by life insurance companies seeking stable, long-term investments. Life companies offer competitive rates and terms for low-risk properties in major markets.Key advantages:
- Low interest rates
- Long repayment terms (10-25 years)
- Non-recourse options
But there are some limitations:
-- Strict underwriting criteria
- Limited to high-quality properties
- Larger loan sizes required
If you have a Class A property in a major market, a life company loan could provide attractive, long-term financing. Look for life companies active in your market and work with an experienced broker to secure the best terms.
6. Hard Money Loans
Need fast funding for a real estate investment or fix-and-flip project? A hard money loan could be the solution. These short-term loans are funded by private investors, with a focus on the property’s value rather than the borrower’s creditworthiness. Hard money loans offer quick funding and flexible terms, but come with higher rates and fees.Benefits include:
- Fast funding (as quick as a few days)
- Flexible underwriting criteria
- Short-term options (6-24 months)
Drawbacks to keep in mind:
- High interest rates (10%+)
- Steep origination fees
- Lower LTV ratios
If speed is your top priority and you can handle the higher costs, a hard money loan could provide the fast funding you need. Look for reputable hard money lenders and carefully compare terms before committing.
7. Mezzanine Financing
Need to boost your borrowing power for a commercial real estate deal? Mezzanine financing could bridge the gap. This type of financing is subordinate to the primary mortgage, providing additional leverage. Mezzanine loans are structured as debt or preferred equity, with higher rates to compensate for the increased risk.Key features:
- Boosts borrowing capacity
- Maintains equity control
- Improves returns
But there are tradeoffs:
- High interest rates (12%+)
- Strict underwriting criteria
- Potential loss of control in default
If you need to maximize your loan proceeds and can handle the higher costs, mezzanine financing is worth exploring. Work with an experienced advisor to structure the deal and negotiate favorable terms.
8. Seller Financing
Struggling to secure traditional financing for a commercial property purchase? Seller financing could be the answer. In this arrangement, the seller provides financing to the buyer, acting as the lender. Seller financing offers flexibility and potentially better terms than traditional loans, but requires a willing and financially stable seller.Benefits of seller financing:
- Flexible terms
- Potentially lower rates and fees
- Faster closing process
Potential drawbacks:
- Requires willing seller
- Seller’s financial stability is key
- May have balloon payment
If traditional financing isn’t an option, seller financing is worth considering. Negotiate terms that work for both parties and do your due diligence on the seller’s financial position before committing.Choosing the right commercial real estate loan is key to the success of your investment. Consider your specific needs, financial situation, and investment goals when evaluating options. Work with experienced professionals, shop around, and run the numbers using a commercial mortgage calculator to find the best fit. With the right financing in place, you’ll be well on your way to achieving your commercial real estate ambitions.