5 Types of Commercial Loans

Commercial real estate loans can help owners get through tough times

man signing loan document in front of banker
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Commercial property owners typically need mortgages when they want to construct buildings. After the buildings are constructed, they sometimes need additional financing to keep them fully leased and in good condition. That’s why banks, private lenders, insurance companies, pension funds, and even the U.S. Small Business Administration offer commercial real estate loans that can help bring deals to fruition. They can create business partners and even help owners avoid foreclosure.

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 revenue. Although the risk is high, the money-making incentives can be even higher. Understanding the various loan options that are out there and how they work can help real estate professionals and commercial building owners better navigate financing opportunities in times of need.

Bridge Loans

A bridge loan gives the borrower instant cash flow to finance a project’s immediate needs. Bridge loans are temporary, usually with a term of one year or so. They're normally obtained while the borrower is waiting for long-term financing to come through.

Bridge loans are usually offered by private lenders. They require excellent credit scores and proof of income. Borrowers must also show that they have enough cash to cover property's existing expenses plus repayment of the new loan.

Real Estate Purchase Loans

Real estate purchase loans are similar to fixed-rate and adjustable-rate commercial mortgages. Borrowers must have excellent credit to qualify for this type of loan—a credit score of 700 or higher—and significant savings in both business and personal bank accounts. Lenders require that the commercial property be used as collateral and the loan’s interest rate is determined by the loan-to-value ratio.

Hard Money Loans

The owner must list the commercial property as collateral to qualify for a hard money loan even if the loan is being used to save the property. Hard money loans are normally offered by private lenders who don’t have to meet the same standards as mainstream commercial lenders. They carry a high risk of default and a correspondingly high-interest rate.

These loans are temporary, not long term, and are only offered when time is of the essence, such as during a foreclosure proceeding.

Joint Venture Loans 

A joint venture loan can be appropriate when all parties share equally in a property's profits and losses. This type of loan can be advantageous if neither party can obtain proper financing on his own. Private investors and investment firms usually offer joint venture loans. Typically, two partners in a group apply for the financing together. Unlike with a true real estate partnership, the relationship between the loan applicants doesn't have to be official or extend beyond the financed property and the loan.

 

Participating Mortgages

The lender is permitted to share in part of the revenue generated by a commercial property in a participating mortgage. The lender receives its monthly mortgage payment along with interest, as well as a share in the property’s rental income or sales proceeds.

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

What about C&I loans?