This guide covers commercial real estate loans. The team at Gustan Cho Associates are expert advisors on commercial real estate loans. Gustan Cho has owned and operated more than 3,000 rental units as a commercial real estate investor and has advised and counseled countless investors.
Gustan Cho Associates Mortgage & Real Estate Information Center provides the latest and most up-to-date commercial real estate loans available today.
Commercial real estate loans are underwritten differently than residential loans. With commercial real estate loans, the lender is primarily concerned with the property itself or the combination of the property and the credit and financial strength of the borrower. Non-recourse commercial loans are commercial loans where the mortgage lender primarily concerns the property. The borrower has no liability on non-recourse loans if the property goes into default.
Non-Recourse Commercial Real Estate Loans
On non-recourse commercial real estate loans, the lender will foreclose the property and does not go after the assets of the borrower. The borrower has no liability on non-recourse loans because they do not personally guarantee on the note. Recourse Commercial real estate loans are loans where the borrower does have to be the guarantor of the note of the commercial real estate loans and is responsible if they fall behind on the note and default on the commercial real estate loans.
One to four-unit owner-occupant residential property up to 4 units is considered a residential loan. Any residential apartment building with more than five units is considered commercial property and investors need a commercial loan.
One-to-four-unit residential properties that are not owner-occupant homes can be investment homes. Borrowers can qualify for any Residential loan program on one-to-four-unit multi-family homes with owner-occupied FHA, VA, USDA, and conventional loans. Any properties with a commercial space or residential units with more than four units are considered commercial loans. Terms on commercial loans are different than those of residential loans.
Terms of Commercial Real Estate Loans
Since commercial real estate loans cannot be sold to Fannie Mae or Freddie Mac, most commercial real estate loans are adjustable rate mortgages, commonly known as ARM. With adjustable-rate mortgages, the loan is amortized over 20 or 30 years (each commercial lender determines the loan term) and has a fixed rate for a certain period.
Once the fixed-rate period on the adjustable-rate mortgage expires, the interest rate will re-adjust every year for the term of the commercial real estate loans.
A fixed margin will determine the adjusted new interest rate plus the index (the index is not a fixed rate and constantly changes, and the volatility of the change is determined by the particular index: LIBOR, COFI, CMT ). In the following paragraphs, we will cover commercial real estate loans.
Multi-Family Properties Commercial Real Estate Loans
Multi-family commercial loans are the most popular and easiest type of commercial financing a real estate investor can get. Most lenders like Multi-Family commercial real estate loans due to their low-risk tolerance. It is easier and more streamlined to lease vacant apartment units to renters than leasing commercial space to a commercial tenant.
Apartment buildings and complexes five units or more, and mixed units with combination of residential and commercial space, all fall into commercial real estate loans.
Loan-to-value requirements are normally 80% LTV on apartment building loans. However, a lender may require a lower loan-to-value if the lender deems the property or borrower high risk. Both recourse and non-recourse commercial mortgage loans are available.
Mixed-Use Properties Commercial Real Estate Loans
Mixed-use commercial real estate loans are available at competitive terms and rates. These mixed-use commercial buildings combine residential units with commercial spaces such as retail stores and offices. There are buildings where the first floor is retail and the second floor is apartments.
Most commercial real estate loans are amortized over 20 to 30 years. However, some Commercial Lenders can amortize the loan term to 10 and 15 years.
Examples of Mixed-Use Properties include a commercial property with a storefront on the first floor and an apartment on the second floor or offices on the ground floor and apartments on the second floor. If you are buying a two-unit building with a storefront on the first floor and an apartment on the second floor, which is going to be owner-occupied, you can possibly qualify for a residential mortgage loan. The residential portion of the building needs to be 51% of the space or greater for it to be a primary owner-occupant property and eligible for primary home financing.
Retail Spaces And Strip Shopping Malls Commercial Loans
Retail stores and strip shopping malls. Retail spaces and strip shopping malls are common commercial real estate properties that can be financed through various commercial loans. Investors and business owners typically use these loans to acquire, refinance, or develop retail properties. Here are some key considerations and types of commercial loans you might encounter in this context:
Traditional Commercial Real Estate Loans
Traditional commercial real estate loans are similar to residential mortgages used for commercial properties. They typically have fixed or variable interest rates and terms ranging from 5 to 30 years. Borrowers often need to provide a down payment, and the property is collateral.
SBA Loans For Owner-Occupied Business Owners
The U.S. Small Business Administration (SBA) offers various loan programs that can be used to finance retail spaces and strip malls. The SBA 7(a) and 504 loan programs are commonly used for real estate financing. These loans often come with favorable terms and lower down payment requirements.
Ground-Up New Construction Loans
Ground-up land acquisition and new construction loans are financial instruments used in real estate development to fund land purchase and construction of new properties. These loans are typically utilized by real estate developers and investors looking to create new residential or commercial properties from the ground up.
Ground-Up Land Acquisition Loan
A ground-up land acquisition loan is a type of financing that provides funds to acquire raw land or undeveloped property. Developers or investors use these loans to purchase the land they intend to build a new structure.
Ground-up land acquisition loans are typically secured by the purchased land itself, which serves as collateral for the loan.
The loan amount may cover the purchase price of the land and related acquisition costs, such as legal fees, property surveys, and due diligence expenses. Interest rates, terms, and eligibility criteria for land acquisition loans can vary widely among lenders. They may depend on factors such as the borrower’s creditworthiness, the land’s location, and the property’s intended use.
New Construction Loan
A new construction loan, also known as a construction-to-permanent or construction loan, is designed to finance the actual building or development of a property on the acquired land. New construction loans cover construction costs, including materials, labor, permits, and other expenses associated with building a new structure.
Terms of New Construction Loans
New construction loans typically have a short-term, interest-only period during the construction phase. Once construction is completed, the loan may convert into a permanent mortgage or be refinanced into a long-term financing solution. Lenders often disburse funds in stages as construction progresses, ensuring that the borrower has the necessary funds to complete the project. Like land acquisition loans, interest rates and terms for new construction loans can vary depending on the lender and the specific project.
Risks on Group-Up Land Acquisition and New Construction Loans
It’s worth noting that ground-up land acquisition and new construction loans carry certain risks for lenders, as the collateral (land or the partially completed property) may not have an established value until the project is finished.
Borrowers typically need a well-thought-out business plan, feasibility study, and a track record of successful projects to secure acquisition and new construction loans.
Real estate developers and investors often work closely with lenders, architects, contractors, and other professionals to ensure the successful completion of their projects while managing the financial aspects of land acquisition and construction.
Spec-Home Builder Developer New Construction Loans
The team at Gustan Cho Associates are experts in land acquisition and construction of the property all-in-one loan on non-owner occupied properties. The spec-builder developer new construction loan is one of the most sought-after programs. The spec-builder developer new construction program is for a real estate investor who has built at least two homes.
The spec-builder developer new construction loan program is for one to four unit residential buildings. We will fund the land acquisition and construction.
Through our sister company, Lending Network, LLC, the builder needs to put a 25% to 30% down payment on the land purchase. Lending Network, LLC will fund 100% of construction cost if the after-construction value is 70% loon-to-value. You may need a construction loan to build a new retail property or expand an existing one. These loans provide funding for construction costs, and once the project is completed, they are often converted into long-term commercial mortgages.
Commercial Bridge Loans
Bridge loans are short-term loans that bridge a financing gap until a more permanent financing solution, such as a traditional mortgage, can be secured. They can be useful for property acquisition or renovation. Gustan Cho Associates offers bridge loans for one-year terms.
Bridge loans are hard money loans. Terms are one to three years. Bridge loans are interest only and is used on properties that would not otherwise qualify for traditional financing.
If the borrower needs to extend the bridge loan past 12 months, the bridge financing agreement would have an extension addendum where it can extend for an additional 12 months. Once the subject property has been stabilized, the investor will get traditional long-term commercial financing and pay the bridge loan off.
Commercial Lines of Credit
A line of credit can cover operating expenses, repairs, or improvements for your retail property. It provides flexibility in borrowing and repayment, and interest is only charged on the amount borrowed. There are various types of commercial lines of credit.
The team at Gustan Cho Associates can help business owners with creative financing where they can have access to commercial lines of credit.
First, all business owners should form a limited liability company or a sub-chapter S Corporation and develop business credit. We can help business owners establish and build their business credit with unsecured business credit cards up to $250,000, accounts receivable financing, and access to a blanket business line of credit for operating costs.
Private Equity and Investor Financing
Some banks and lenders offer portfolio loans, which are not sold to secondary markets like traditional mortgages. They may have more flexible terms and underwriting criteria. Retail property investors may sometimes seek financing from private equity firms or individual investors.
Lenders of private equity financing will assess the real estate investor’s down payment, experience, and scope of work when determining eligibility and loan terms.
Additionally, working with a commercial real estate broker or financial advisor specializing in commercial real estate can be beneficial in navigating the loan application process and finding the right financing solution for your specific needs.
Industrial Commercial Buildings
Warehouses as well as multi-tenant industrial buildings. Industrial and commercial buildings are two distinct structures designed for different purposes. To facilitate the movement of goods, industrial buildings often have loading docks for trucks to load and unload materials.
Safety is a significant concern in industrial settings. Industrial commercial building have annual inspections by the city or OSHA if they have many employees.
Industrial buildings may have features like fire suppression systems, emergency exits, and safety equipment. In this section, we will discuss the various types of industrial commercial buildings. There are different types of financing for industrial commercial real estate. There are acquisition and construction loans and permanent traditional industrial and commercial real estate loans.
Industrial Commercial Real Estate Loans
Industrial buildings are constructed primarily for manufacturing, processing, warehousing, and other industrial activities. These structures are designed to house heavy machinery, equipment, and production processes.
Key characteristics of industrial buildings include large open spaces. Industrial buildings have specialized utility systems such as high-capacity electrical systems, ventilation, and plumbing to support industrial processes.
Industrial buildings often have high ceilings and expansive open floor plans to accommodate machinery and storage needs. There are heavy-duty construction commercial real estate. Heavy-duty construction buildings are typically constructed with robust materials capable of withstanding the weight of heavy equipment and machinery.
Zoning and Regulations on Commercial Real Estate
Industrial buildings are subject to zoning regulations that dictate where they can be located and the types of activities allowed. Examples of industrial buildings include factories, warehouses, distribution centers, manufacturing plants, and processing facilities.
Commercial buildings are intended for businesses engaged in retail, offices, services, or other non-industrial activities. These buildings are designed to provide functional, aesthetic, and comfortable spaces for customers, employees, and clients. Key characteristics of commercial buildings include: Commercial buildings come in various architectural styles and designs, depending on their intended use and the business owner’s preferences.
Retail Commercial Real Estate
Shopping malls, strip malls, and standalone stores are common commercial buildings designed for retail businesses. Retail commercial real estate can be profitable and low maintenance with stable long term tenants. However, if a commercial retail space tenant vacates, it could take months to get a new long term tenant.
The risk factor comes with today’s state of economy of the high cost of borrowing money, skyrocketing inflation, increasing taxes, and political unrest, it is hurting many businesses.
Many businesses are facing hard ship with commercial tenants downsizing or operating their businesses with reduced income due to high cost of goods and skyrocketing interest rates. The overhead on retail commercial real estate often increase year after year. Investors can qualify for an SBA loan on retail commercial real estate if they own a business operating in the retail building and rent out the rest. Retail buildings can consist of small businesses that are independently owned or owners of franchises. The value of the retail commercial real estate is based on the income the property generates.
Commercial Office Buildings
Office condo units, Office Buildings, and complexes all fall into the Office Spaces Commercial Financing Category. Office buildings provide spaces for businesses, from small start-ups to large corporations. Office building are facing large vacancy rates due to many businesses transitioning to remote work. Technology in the workplace such as ZOOM has the largest companies vacating brick and mortar office spaces. Many commercial office buildings are converting to commercial office suites.
Service-Industry Commercial Buildings
Commercial buildings can also include restaurants, hotels, banks, healthcare facilities, and other service-oriented establishments. These buildings may include amenities like parking areas, elevators, escalators, and public restrooms. Commercial buildings must often comply with accessibility regulations to accommodate people with disabilities.
Advertising and Signage
Businesses in commercial buildings often use exterior signage and advertising to attract customers. Commercial buildings typically have a more diverse range of uses and appearances than industrial buildings, primarily focused on industrial operations. It’s important to note that industrial and commercial buildings’ specific designs and features can vary widely depending on the industry, location, and regulations governing their construction and use.
Hard Money Loans
Hard money loans are commercial real estate loans that are funded by groups of private money investors and often is equity-based. The hard money lender is more concerned about how much skin in the game the investor has on the project rather than the investors’ credit or financial. Hard money loans are short-term loans. Hard money lenders are mainly concerned on how much down payment the borrower has for the down payment or equity in the subject property.
Terms and Rates on Hard Money Loans
Hard money loans are not just for real estate investors with bad credit or investors who cannot get traditional financing. Many real estate investors opts for hard money loans versus traditional financing at banks due to the speed.
Hard money lenders require limited documents and close in a matter of days. Traditional real estate loans from banks take weeks if not months to close with a lot of red tape.
Terms on hard money loans are 25% to 30% equity or down payment, one year interest only, and interest rates between 10.99% to 15.99%. Hard money loans renews each year if the borrower needs to extend the term.
Hard money loans are typically short-term, high-interest loans secured by the property’s value rather than the borrower’s creditworthiness or income. Hard money loans can be an option for investors who need quick financing or have credit issues. Hard money loans normally can close quickly and often have higher origination fees and interest rates than traditional commercial loans. Commercial mortgage lenders normally require at least a 30% down payment or 70% loan-to-value hard money loans. Average timeline for builders to break ground and sell and close the property is seven months.
Hard Money Lenders
Many private investors and hard money lenders are interested in commercial real estate partnerships. When seeking a commercial loan for retail spaces or strip shopping malls, it’s essential to consider the property’s location, condition, income potential, and financial qualifications. Hard money lenders want the borrower to have skin in the game.
Hard money loans are short-term loans. Investors utilizes hard money loans for commercial real estate as a bridge until it has been stabilized for traditional financing.
Often, many real estate investors with less than perfect credit or need time to document their income situation may use hard money lenders to purchase real estate. Once they have their credit situation, they can refinance their hard money loan to a traditional commercial mortgage loan.