Lesson 4 Commercial Real Estate Lending 101
Lesson 4
Commercial Real Estate Loan Rates, Broken Down by Type
A wide variety of lenders provide commercial real estate financing. While SBA loans and bank loans are generally reserved for the most qualified borrowers, hard money loans and bridge loans are more widely available.
Here’s a summary of each of the main types of commercial real estate financing and their cost:
SBA CDC/504 Commercial Real Estate Loan Rates
Interest Rates: 4.5% – 6.5% on CDC portion
LTV Ratios: 85% – 90%
SBA CDC/504 loans are the most affordable commercial real estate loans, with rates as low as 4%. Commercial mortgage loan interest rates for this product will be favorable because the Small Business Administration (SBA) guarantees a portion of the loan, which will in turn fund the purchase or renovation of real estate, equipment, machinery, or other capital intensive assets.
A CDC/504 loan can range from $200,000 to $5.5 million and is actually comprises two loans: An SBA-approved Certified Development Company (CDC) covers 40% of the project’s cost, and bank or private lender covers 50% of the project’s cost. The remaining 10% of the loan must come from the borrower’s down payment.
The biggest benefits of SBA 504 loans are the long terms and low, fixed interest rates. These commercial real estate loan terms go up to 25 years, so you can enjoy low monthly payments, and the commercial real estate interest rates here are fixed, so you can lock in a good rate without worrying about future increases.
While the CDC portion of the loan has rates as low as 4.5%, the bank portion of the loan might have slightly higher rates, but they'll still remain in the single digits. Not only do these loans have the best commercial real estate loan rates, but they also have the highest LTV ratio—90% of the purchase price in most cases.
The catch is that it’s difficult to qualify for an SBA CDC/504 loan: You must have excellent credit (above 650), and your business should be profitable and at least two years old.
SBA 7(a) Loan Rates
Interest Rates: 7.5% – 10%
LTV Ratios: 80% – 90%
SBA 7(a) loans are another SBA loan program, the most popular in fact. SBA 7(a) loans, which go up to $5 million, can go towards almost any business purpose, including the purchase or renovation of commercial property.
These have low interest rates too, but the terms aren’t quite as favorable, because 7(a) loans are general purpose loans that aren’t not designed specifically for commercial real estate funding, like 504 loans are.
Commercial real estate loan interest rates on 7(a) loans are currently between 7 and 9.5%, and they can be fixed rate or variable (and if they are variable, your monthly payments can increase over time. SBA 7(a) lenders will usually require a down payment of 20%, and terms go up to 25 years.
One of the downsides to SBA loans is the time it takes for a lender to process and approve your loan—it can take several weeks, even months. Fortunately, companies like SmartBiz have sped up the SBA loan process, streamlining the application and shortening the timeline to under one month in many cases.
Regular Bank Loan Rates
Interest Rates: 5% – 7%
LTV Ratios: 75% – 80%
Regular bank loans are another option for business owners in need of affordable commercial real estate loan rates. The SBA guarantee is great, but there are a lot of rules and regulations the bank has to follow before it can approve and fund an SBA loan. Smaller community banks in particular may not be familiar with the process, but they may be willing to give you a traditional commercial loan.
The rates on these loans are very similar to SBA loan rates, with two exceptions. It’s harder to get small loans (under $250K) from a bank because it’s not profitable for them to spend a lot of time processing smaller loans. And you might have to put up a slightly larger down payment for a traditional loan because the bank won’t have the assurance of the SBA guarantee.
Commercial Bridge Loan Rates
Interest Rates: 5% – 30%
LTV Ratios: 50% – 90%
Commercial bridge loans provide short-term commercial real estate financing when you need to act quickly on a real estate opportunity. Bridge lenders provide loans with terms of six months to a year during which you make interest only payments. At the end, you either have to pay the entire balance of the loan or refinance with a long-term loan.
For example, say you have a restaurant and are looking to expand. You might learn that the shop next door is going out of business and want to quickly move on the opportunity to buy the neighboring shop to build out your restaurant. A bridge lender can finance the purchase within a few days. Once the term is over, you either have to pay the full balance of the loan or (more realistically) refinance with a conventional loan or other long-term product.
A variety of lenders provide bridge loans, including banks, credit unions, private lenders, and online lenders. The commercial real estate loan interest rates for this product will vary based on who the lender is, but getting your bridge loan and your later long-term loan from the same lender often results in the best deal. Be wary of origination fees, application fees, and other fees that can jack up the total cost of your short-term loan.
Hard Money Loan Rates
Interest Rates: 10% – 30%
LTV Ratios: 50% – 75%
Hard money loans are commercial loans from non-bank lenders. Hard money lenders may be individuals, online lenders, or other private lenders. These loans are very popular among small business owners who want to purchase or renovate real estate but can’t qualify for bank loans or SBA loans.
Not only do hard money lenders have lower qualification requirements, but they also work much more quickly than banks. The timeline for receiving your funds is usually 1 to 2 weeks, versus several months with a bank. Rates can range anywhere from 5% to 30%, but are in the neighborhood of 10% to 20% for the typical borrower.
Aside from higher commercial real estate loan rates, the other downside to hard money loans is that they are short-term loans. Most hard money loans have 1- to 5-year terms, so, similar to bridge loans, they are best for buying investment properties or financing other short-term deals. If you have a more conventional transaction, such as buying office space for your business, you’re better off with a longer-term loan.
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Class #5 Tomorrow Wednesday Jan 22nd 2019