When it comes to purchasing real estate, many developers, builders, and owners seek loans from banks or other financial institutions. This post covers 8 types of commercial real estate loans, or lending terms associated with CRE debt financing:
We've included answers to common questions about CRE lending: How long are commercial real estate loans, what are common types of commercial real estate loans, and what are typical CRE loan terms?
There is another type of financing, called equity financing, which involves receiving financing in exchange for something, typically an ownership stake in the property. Learn more about private equity, REITs and REIFs.
Need help finding CRE lenders? We cover that too: Where to Find 4 Types of CRE Lenders
CRE Lending Requirements
A commercial real estate loan is made to a business entity or individual to purchase a commercial property. Commercial real estate loans have shorter terms than, say, home mortgages. CRE loans are usually around 5 to 10 years, rather than the 20 to 30 years that one would expect from home loans.
As with any type of loan, there is an application process where the prospective lender evaluates the business' financial health and credit rating. Borrowers will need to have good credit to secure a commercial real estate loan at an affordable rate. Good credit is a score of 670 or higher (Nerdwallet), and you'll likely need to show strong annual revenues.
Within the commercial real estate space, there are a few types of loans available, which we list next, if you’re looking for a loan for investing, developing, or running a business property.
Types of CRE Loans
Commercial Mortgages
Broadly speaking, commercial mortgage is a blanket term that covers most loans for commercial properties. Standard, conventional commercial property mortgages will look a lot like home mortgages, just with a much shorter term.
This means around a 25% down payment with a fixed mortgage rate anywhere from 5 to 30 years. These types of loans are most commonly used by investors buying a property asset with a fixed cash flow. The lender secures the loan by placing a lien against a property. A lien, as you may know, is a legal claim against a property. The following are typical rates and amounts, as compiled by Business.org.
Average rates: 4% to 8%
Average LTV ratio: 70% to 80%
Typical minimum loan amount: $1 million
Typical max term: 30 years
Commercial Bridge Loan
A type of short-term, high-interest-rate commercial mortgage is called a bridge loan. This is because the loan is designed for a commercial property that doesn’t yet qualify for permanent financing. This type of loan bridges the gap between their current state into a better, future state.
Bridge loans generally range from 1 to 3 years and are interest-only with rates as low as 6% to as high as 13%*, backed by collateral. Investors can use them to offset significant costs, such as renovations, which may help them make more money through leasing or reselling the property.
Average rates: 9% to 13%
Average LTV ratio: 80% to 90%
Typical minimum loan amount: $1 million
Typical max term: 1 year
Commercial Hard Money Loans
Hard money loans are forms of bridge loans with higher interest rates for a higher degree of risk. These loans are most commonly used in high-risk situations such as bankruptcy or when a business needs to quickly purchase or refinance a commercial property. These are the highest-fee loans available.
Hard money loans can have interest rates from 10% to over 20%* and should only be used when an investor or business needs to move quickly.
Average rates: 10% to 20%
Average LTV ratio: 50% to 55%
Typical minimum loan amount: $150,000
Typical max term: 2 years
Non-recourse loans
This loan type is an agreement between the lender and the borrower that says, if the borrower defaults on their loan, the lender can seize the collateral that the loan is backed by. However, the borrower is not responsible for any further compensation — they will just lose the collateral. In other words, the lender will have less of a recourse when collecting on the defaulted loan.
This loan type offers a higher risk to the lender because the value of the collateral may change over time. These loans are far more restrictive in their terms and are only available to those with high credit scores. They also may have higher interest rates as a result of the risk to the lender: 7% to 13%.
CMBS (commercial mortgage backed security) loans are a type of non-recourse loan that lenders make based on the health of a property, not the financial health or history of the borrower. These non-recourse loans tend to have lower interest rates, according to Business.org:
Average rates: 4.3% to 5%
Average LTV ratio: 70% to 75%
Typical minimum loan amount: $2 million
Typical max term: 10 years
SBA 7(a) and 504 Loans
These loans are government-backed small business loans provided by a Small Business Administration (SBA) lender.
An SBA 7(a) loan is used for businesses purchasing, remodeling, refinancing, or constructing a property up to $5 million. This loan will finance up to 100% of a property’s value, but typically, it's 80% to 90% LTV. The business will need to put down 10% of the property’s purchase price and be at least 51% owner-occupied.
Average rates: 5.25 to 9.25%
Average LTV ratio: 80% to 90%
Typical minimum loan amount: $350,000
Typical max term: 25 years
An SBA 504 loan can be used only for business machinery, equipment, or property. These loans finance up to 90% of a property’s value. The loan term is generally 20 years, with interest rates between 3.5% and 5%* or higher.
Average rates: 4.38% to 4.49%
Average LTV ratio: 80% to 90%
Typical minimum loan amount: $1 million
Typical max term: 20 years
Mezzanine Loan
Mezzanine loans are short-term loans meant to be an additional layer of financing on top of a traditional loan that’s already been taken out. A mezzanine loan is meant to be used when the investor or business has additional purchases or costs they need to fulfill with a loan.
A mezzanine loan has an interest rate of anywhere from 9% to 16% and usually has terms no longer than 5 years (source: Janover).
Average rates: 8% to 9%+
Typical max term: 1 to 5 years
Loan syndication
A loan syndication is a single loan that’s made up of multiple different lenders like a bank, credit union, or private equity fund. That is, multiple lenders contribute capital to a single loan. This is most common with ambitious commercial real estate projects that require more funding than a single financier may be able or willing to provide. Loan syndication spreads the risk across multiple lenders and allows for more competitive interest rates and more diverse expertise on the lenders’ team.
With loan syndication, one financial institution will act as the lead lender and organize acquiring funding from other lenders. They may set the initial terms based on their negotiations with the other lenders. For this reason, the interest rate and term length will be highly dependent on the lead lender that you work with, as they’ll be responsible for
marketing the opportunity to other lenders.
Debt funds
Debt funds are investments funded by private capital that provide loans to real estate projects. Rather than the capital being provided by a bank or other major financial institution, these funds are made up of several, sometimes dozens, of individual smaller investors. These investors receive 8% to 10% of their investment based on the interest of the capital that’s been loaned to real estate buyers or developers. Debt fund investors typically have an investment term of 6 to 12 months.
A debt fund loan is known for having a capped amount of returns for investors and has a mild risk attached. These funds also prefer single family homes over commercial real estate, but CRE debt funds do exist. For pursuing a debt fund as an investment option, we recommend consulting with an investment advisor to get more information about interest rates and loan terms.
*The information in this article is for informational and educational purposes only and should not be taken as financial or legal advice. Interest rates for commercial real estate loans are just as sensitive to economic changes as consumer loans are. See “Downloads and Resources” on the Small Business Administration website for the latest CRE rates.