Commercial Mortgage Loans

Who would Benefit from a Commercial Loan and How does it Work?

A commercial real estate loan is a financing product designed for businesses or investors to purchase, develop, or renovate commercial property. Unlike residential loans, which are typically for individual homeowners, commercial real estate loans cater to properties meant for business purposes, such as office buildings, retail spaces, warehouses, hotels, and multifamily housing units just to name a few.

Here’s how a commercial real estate loan works:

1. Purpose: These loans can be used for various purposes, including buying new commercial property, refinancing an existing property, developing land, or renovating an existing commercial building.
2. Types of Lenders: Commercial real estate loans can be obtained from banks, credit unions, private investors, or commercial mortgage-backed securities (CMBS) lenders.
3. Loan-to-Value (LTV) Ratio: Lenders typically finance a percentage of the property’s appraised value. For instance, if a lender offers an 80% LTV, for a property worth $1 million, they will provide a loan of up to $800,000.
4. Interest Rates: The interest rates can be fixed or variable. Rates are generally higher than residential mortgage rates due to the increased risk associated with commercial properties.
5. Repayment Terms: Commercial loans often have shorter terms than residential mortgages, ranging from 5 to 20 years, with balloon payments at the end. Some loans might have an amortization period longer than the loan term, resulting in a balloon payment at the end.
6. Fees and Costs: Borrowers typically encounter origination fees, appraisal fees, and other closing costs. Some loans also have prepayment penalties.
7. Qualification Criteria: Lenders evaluate the potential borrower’s creditworthiness, the profitability of the business (if applicable), the property’s potential income, and the overall financial health of the borrower or business. Often the NOI and Cape Rate are important variables the lender will use to evaluate the current and future values driving loan maximum.
8. Collateral: The commercial property itself usually serves as collateral. If the borrower defaults, the lender can seize the property through foreclosure.
9. Draw Schedule (for Construction Loans): If the commercial real estate loan is for construction, funds are often disbursed based on a draw schedule, which releases funds at various construction milestones.
10. Recourse vs. Non-Recourse: Some commercial loans are “recourse,” meaning the borrower personally guarantees repayment and can be personally liable in case of default. “Non-recourse” loans, on the other hand, limit the lender’s recovery to the collateral (the property).

In essence, a commercial real estate loan provides businesses or investors with the capital needed to invest in commercial property. It’s essential for borrowers to understand the terms and conditions, as commercial loans can be more complex than standard residential mortgages.