Commercial Real Estate Loans

Commercial real estate loans provide reliable financing, designed to meet your budget and timeline. They are often a great choice for investors that purchase property to use as an income-producing asset.

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They also help business owners expand their operation by buying a building. However, there are several things to keep in mind before pursuing this financing.

Collateral

When it comes to real estate collateral, there are a number of options available to you. The type of collateral you use will depend on your individual situation, the lender and the financing needs of your business. For example, a personal guarantee is often a good option for borrowers who have sufficient wealth, credit worthiness and name recognition to provide an assurance that they will repay the loan if it goes bad.

Other forms of collateral may include a line of credit, ACH financing or other sources of cash flow. For example, some lenders might look at a company’s revenue in addition to the physical property when assessing their creditworthiness. This can be a more flexible form of collateral than a commercial mortgage loan, which requires that the borrower pledge their own personal assets.

Other forms of collateral can include equipment, inventory, accounts receivable and payable, and even a life insurance policy. Typically, this is not as common as using the property as collateral because it can be difficult to value and sell. However, it can still be a good alternative for borrowers who do not want to put their home at risk or who may not qualify for traditional loans from banks or credit unions. Ultimately, the most important factor in finding the right commercial real estate loan is to work with a lender who understands your business and can help you determine what types of financing are right for you.

Interest Rates

Commercial real estate loan interest rates vary greatly and are based on many different factors. As with any type of loan, it is important to compare rates from multiple lenders to make sure you’re getting the best deal.

The most common commercial real estate financing options are conventional bank loans and private equity investments. These types of financing are ideal for borrowers with strong credit who are working with mid- to large-sized projects. They are also suitable for borrowers who can provide substantial down payments.

Another factor that influences commercial real estate loan interest rates is the debt service coverage ratio (DSCR). This ratio is a measure of the property’s ability to cover its mortgage debt with net operating income. Lenders will typically require a DSCR of at least 1.25, and in some cases up to 1.5.

It is important to work with a lender that has extensive experience with commercial real estate loans. They will be able to guide you through the process of finding a commercial mortgage that fits your needs. They can also help you understand the different types of investment properties available and advise on which is the right fit for your business. In addition, a lender with extensive experience in commercial real estate will be able to provide you with faster processing times than traditional lenders.

Recourse or Non-Recourse

If you are a commercial real estate investor looking for financing, it’s important to understand the difference between a recourse and non-recourse loan. Non-recourse loans do not allow a lender to pursue personal assets of the borrower or guarantors in the event of default. Instead, they rely solely on the collateral of the property to pay off the debt. However, it’s important to understand that non-recourse financing isn’t necessarily risk free. Most lenders will only offer this type of loan for stable, income-producing assets.

With a recourse loan, the lender can pursue the borrower’s personal assets in addition to the asset being collateralized by the mortgage. For instance, if the sale price of the property does not cover the balance on the note, the lender can go after the borrower’s other assets (like other pieces of property or even their retirement accounts).

As such, most lenders will only offer non-recourse financing for highly experienced sponsors with well-performing properties in great locations. Additionally, the rates on non-recourse loans are often higher as the lenders will be taking on more risk. Regardless, if you are able to secure non-recourse financing, it can help mitigate some of the worse effects of a CRE crash. Additionally, some loans will have a bad boy carve-out clause that allows the lender to pursue the borrower’s personal assets after certain triggers like fraud or misrepresentation.

Lenders

Many lenders offer commercial real estate loans, including online lenders and banks. The best lender for you will have experience with CRE loans and understand your business needs and goals. They will also be able to explain the different types of loans and their pros and cons, as well as how interest rates and fees differ.

When applying for a commercial real estate loan, you will need to submit several pieces of documentation. Lenders usually want to see your personal credit report, business financial statements and a detailed listing of each property you own, the tenants occupying the space and the leases. They will also want information on the local vacancy rate and details of any planned renovations.

Unlike residential mortgage loans, which are given to individuals, commercial property loans are usually given to a corporation, developer or trust. A business owner can, however, obtain a commercial real estate loan on behalf of a partnership or LLC.

While commercial real estate loans can be used to purchase an existing property, they are typically used to finance construction or renovation projects. Repayment terms can range from five to 25 years and are often based on the type of property, the lender’s business requirements and your creditworthiness. At the end of the term, you can sometimes get out of a commercial real estate loan early through a process called defeasance.