What Are Commercial Real Estate Lending And Their Types?

Commercial real estate loaning is the financing given to companies to purchase or refinance business-related properties.

Fremont, CA: Commercial real estate lending offers mortgage loans or financing to companies to buy properties used for business purposes. Commercial real estate includes:

• Lodgings (like hotels, apartment buildings, condominiums, and housing developments).

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• Office buildings.

• Retail sales buildings (like shopping centers and malls).

• Warehouses and other light industrial manufacturing sites.

• Self-storage facilities.

• Hospitals and other medical facilities.

• Restaurants.

• Recreation parks.

• Raw land.

Importance of Commercial Real Estate Loans

Commercial real estate loans are a vital part of the economy for two major reasons.

1. First, they are generally essential financing for nearly all businesses to be able to operate.

2. Second, since commercial real estate loans are generally much larger than residential real estate loans, they account for considerable income for commercial banks and other lenders that offer them.

Commercial real estate loans may be wanted for different purposes. A company may want to purchase an office, warehouse, or manufacturing space to operate its own business, called owner-occupied commercial real estate. Instead, an investor may look for financing to acquire a rental property that will produce cash flow. Lastly, a development company may require construction financing to fund a new development project.

Types of Commercial Real Estate Loans

While there are loads of specific financing structures that may be employed in commercial real estate lending, broadly speaking, there are five important categories of commercial loans for real estate purchases – ordinary commercial real estate loans, bridge loans, seller- financed loans, loans obtained using the Small Business Administration (SBA), and hard money loans.

1. Ordinary commercial real estate loans

Ordinary commercial real estate financing closely looks like residential mortgage financing. As with typical residential mortgage loans, the purchased property usually serves as the loan collateral. Commercial loans are sometimes called “permanent” loans.

Still, companies can secure a commercial real estate loan with other forms of collateral – like equipment, inventory, other property the company just owns, or even a deposit account of some sort.

2. Seller-financed loans

As with residential mortgage loans, a business looking to buy a commercial property may be able to obtain financing directly from the seller. Seller-provided financing is generally preferred over conventional commercial bank financing, as payment terms are often more flexible. The buyer may also be capable of getting a lower interest rate.

Seller-financed loans are generally available to purchase income-producing properties, such as an apartment complex, or when a company purchases a property from an individual rather than another company.

3. Bridge loans

Bridge loans mean short-term commercial real estate loans. Bridge loans are commonly used for two purposes – either the buyer supposes to sell the property within the time limit of the bridge loan, or they await to enhance their credit rating significantly during that time frame. The credit terms for a bridge loan are generally somewhere between six months and two years.

Commercial developers frequently use bridge loans, for example, expect to complete the construction of an office constructing on purchased land, which they will then sell to another party. They are also utilized by real estate investors who purchase residential properties and “flip” them within a narrow time frame.

4. SBA loans

In the US, small businesses may get an SBA loan, which gives several benefits. When the SBA assurances at least a portion of a commercial real estate loan, the borrower can usually get a considerably more favorable interest rate since the lender has much lower risk exposure.

Also, SBA loan funds can be employed for property purchases and working capital, debt restructuring, buying machinery, purchasing inventory, and other purposes.

5. Hard money loans

Private investors or private lending companies offer hard money commercial loans. The value strictly assures the loans of the property the money is loaned against. Hard money loans are generally offered to companies with less than stellar credit – such that they may find it hard to obtain a loan from a commercial bank, credit union, or other conventional lenders – or companies that may be undergoing some financial trouble.

Most tough money loans are for very short terms, usually one year or less. In that regard, they resemble bridge loans. For example, a hard money loan may help a company handle cash flow or debt service issues by extracting a loan secured by some property the company owns free and clear.

Other Sources for Commercial Real Estate Lending

Including commercial banks, credit unions, the SBA, private investors, and private companies acting as hard money lenders, other potential commercial real estate lending sources include life insurance companies and crowdfunding.

1. Insurance companies

Life insurance companies search for solid, low-risk investments that provide better returns than “risk-free” investments such as Treasury bonds. One avenue of investing they generally pursue is earning returns from making commercial real estate loans to financially sound development companies with excellent credit ratings.

Check Out This : Top Treasury Management Services Companies

2. Crowdfunding

Crowdfunding, online peer-to-peer investment, is a growing commercial real estate lending source. Websites connect private and institutional investors with companies seeking funds for real estate development.

Investors can define their particular areas of interest, both in terms of geography and project types. Crowdfunded REITs(real estate investment trusts) are also growing in popularity.