A Commercial Real Estate Loan is used to buy/re-model an owner-occupied commercial property. An “owner-occupied” commercial property is one where the business occupies at least 51% of the property. This article focuses on financing availability for Owner-occupied commercial loans. These properties can include office, retail, industrial and hospitality properties which together account for 64% of commercial real estate loans. Each of the loans discussed in this article is used for certain types of commercial buildings and they have specific terms and qualifications. Below are 5 types of commercial real estate loans, their uses, and requirements.
1. SBA 7(a) Loan
This loan is a mortgage backed by the U.S. Small Business Administration (SBA). They are the most common types of SBA loans and assist businesses to buy or refinance owner-occupied commercial properties to a range of up to $5,000,000. In the year 2016, 65% of SBA 7(a) loans were obtained by existing businesses and the rest 35% were obtained by new businesses. The bulk of SBA 7(a) loans are used to finance working capital. However, they can be used to purchase new property as well. They have been constructed to help businesses that might be denied by the bank. They are offered to those businesses that fall below a specific revenue threshold and therefore are a tool for stimulating economic growth.
2. CDC / SBA 504 Loan
This loan is also backed by the SBA to help new and existing businesses purchase or refinance owner-occupied property. The CDC / SBA 504 loan is considered 2 loans and there is no maximum loan amount. These loans are less common than the SBA 7(a) loans and offer one of the lowest down payments out of all commercial real estate loans. They are usually issued to businesses that are actively increasing their head count.
3. Traditional Commercial Mortgage
This is a standard commercial loan issued by a bank or lending institution and not backed by the Federal Government. They are used to purchase or refinance owner-occupied office space, retail centers, shopping centers, industrial warehouses, and more. These loans generally require higher qualifications to get approved but have lower interest rates. These mortgages are usually permanent but it is possible to get one with a term as short as 5 years.
4. Commercial Bridge Loan
This is a short-term real estate loan and is used to purchase owner-occupied property prior to refinancing for a longer-term mortgage later in time. These are usually issued by traditional banks and lending institutions.
5. Commercial Hard Money Loan
This is a short-term loan with the purpose of purchasing or remodeling an owner-occupied commercial property prior to refinancing through a long-term loan. This is similar to a Bridge loan as it helps businesses close fast and offer interest-only payments throughout the term of the loan. They are best for short-term investors seeking to renovate a building before refinancing through a permanent mortgage.
