Commercial real estate loans are a relatively new type of commercial loan. Commercial real estate can be used for any number of business purposes, but the main factors that determine how much you would like to borrow, how long you would like your loan to last and how much interest you may pay are based on the type and value of the property.
What Is a Commercial Real Estate Loan?
Commercial real estate loans are a way to finance or refinance the purchase of property used for commercial purposes. Some examples of commercial real estate include:
Apartment buildings
Businesses
Office buildings and shopping malls
Industrial properties such as warehouses, factories and distribution centers
Retail spaces (such as strip malls)
Hotels, motels and resorts
Loan Repayment Schedules
A residential mortgage is a type of amortized loan in which the debt is repaid in regular installments over a period of time. An amortized loan has a fixed rate and an initial principal payment, and the amount that you pay each month is based on how many years you want to pay it back.
A mortgage can be structured as an ARM or fixed-rate loan. With an adjustable rate mortgage, the interest rate changes periodically according to a specified index (such as LIBOR). The income tax bracket determines what portion of your payment will cover taxes – typically 15 percent or 20 percent of your gross monthly income.
If you choose to finance only part of your home purchase with an ARM, you’ll get a lower interest rate than if you financed 100 percent with an adjustable-rate mortgage. However, if you refinance your ARM at any time before it expires, your new rate may be higher than what you originally borrowed for it.
Commercial Real Estate Loan Interest Rates and Fees
Interest rates on commercial loans are generally higher than on residential loans. Also, commercial real estate loans usually involve fees that add to the cost of borrowing.
The following is a list of some common types of commercial real estate loans:
Commercial mortgage loans: These are secured by the property itself, which makes them more liquid than unsecured commercial loans. They also have lower interest rates than unsecured commercial mortgages and can be used for larger projects.
Commercial real estate construction loans: These loans are secured by the completed building or structure and can be used for large-scale projects like restaurants or office buildings. They often have higher interest rates than other types of commercial construction financing options.
Commercial renovation financing: This type of loan is available only to existing buildings or structures that need minor renovations to make them suitable for re-renting at higher prices. The property must be in good condition before applying for this kind of loan as well as being able to pay it back in full when it comes due (though there may be some leniency).
Commercial equipment finance: This type of loan is available only to new equipment and machinery that will be installed in a business’ space, such as computers, printers, copiers and other office equipment
Prepayment
A commercial real estate loan may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan.
For example, if a borrower pays off the loan early, he or she will pay more in interest and points than if he or she had just made monthly payments. Loans with prepayment penalties are typically for longer terms than those without them.
The lender can allow borrowers to prepay early by charging them a penalty. This penalty is often very high — sometimes as much as 50% of the unpaid principal balance. In addition, some lenders add their own penalty to the borrower’s principal balance when they charge off a loan early.
Conclusion
If you have a reliable source of income and are serious about borrowing money, commercial loans can be an excellent opportunity for financing your business. In an ideal scenario, you’ll borrow a lump sum from the bank at an advantageous rate and then use that money to invest in another business. Financial institutions like to see you put some skin in the game as well (which is good for you). Another benefit is that commercial loans tend to come with better terms than do residential mortgages because the borrower is generally more creditworthy, although one never knows in advance until he or she has applied.
